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CASE NO.:

Appeal (civil) 4093 of 1991

PETITIONER:

SOMAIYA ORGANICS (INDIA) LTD.

RESPONDENT:

STATE OF UTTAR PRADESH & ANR.

DATE OF JUDGMENT: 17/04/2001

BENCH:

B.N.KIRPAL & S.S.M.QUADRI & M.B.SHAH & RUMA PAL & K.G.BALAKRISHNAN

JUDGMENT:

JUDGMENT

DELIVERED BY:

B.N.KIRPAL, J.

RUMA PAL, J.

With C.A. No. 2853 of 2001

(arising out of SLP(C) No. 20018 of 1991)

Civil Appeal No. 4093 of 1991 and

C.A. No. 2853 of 2001

( Arising out of SLP (C) No. 20018 of 1991)

Leave granted in SLP (C) No. 20018 of 1991.

KIRPAL, J.

These appeals are sequel to a judgment of this Court in

Synthetics and Chemicals Lt. and Others vs. State of U.P.

and Others wherein it was held that in respect of industrial

alcohol the States were not authorised to impose the impost

they had purported to do. By that judgment delivered on

25th October, 1989 the Court overruled its earlier decision

in State of U.P. and Others vs. Synthetics and Chemicals

Ltd. and Others wherein the validity of such an impost had

been upheld. By the second Synthetics case it was declared

that the impugned provisions were illegal prospectively.

The question which arises for consideration in these

appeals is whether the vend fee which had been levied by the

appropriate State enactments, but not collected whether by

reasons of the orders of the Court or otherwise, can be

collected now when the said provisions by the said judgment

dated 25th October, 1989 have been held to be invalid

prospectively.

For the sake of convenience, we shall briefly refer to

the facts in C.A. No. 4093 of 1991 Somaiya Organics

(India) Ltd. vs. State of U.P. & Anr. The said company

had established a plant at Barabanki for manufacture of

intermediaries out of industrial alcohol. Its promoter

company had sold and transferred to the appellant industry

distillery located at Captainganj. The industrial alcohol

manufactured by the distillery at Captainganj was captively

consumed. On 8th October, 1970 the appellant had been

exempted from paying vend fee which was leviable under the

U.P. Excise Act, 1910. On 9th October, 1979, the State of

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U.P. withdrew the exemption from payment of vend

fee/purchase tax on industrial alcohol. This was challenged

by the appellant by filing writ petitions in the Allahabad

High Court. During the pendency of the writ petitions

interim orders were passed by the High Court whereby the

petitioners before it were required to give a bank guarantee

and/or pay to the State the amounts directed by the Court

which, in an earlier order, the High Court had directed that

it should be kept by the State in a separate account.

As noticed hereinabove, vide decision of a Division

Bench of this Court in first Synthetics & Chemicals case

rendered on 19th December, 1979 the validity of the impost

was upheld. Subsequently, on the matter being referred to a

Bench of Seven Judges, by the second Synthetics case

decision in 1989, the validity of the provisions of the said

Acts permitting levy of excise duty in the form of vend fee

was struck down prospectively.

The High Court by the impugned judgment dated 29th

August, 1990 in Somaiyas case interpreted the direction in

the second Synthetics case relating to prospective

declaration to mean that for the period prior to 25th

October, 1989 the amount payable in respect thereto could be

recovered. It held that once the levy for the period prior

to 25th October, 1989 was saved further steps consequent

upon such levy were equally saved and recovery in respect of

the dues prior to 25th October, 1989 could be effected by

the State. The State was held to be entitled to realise the

vend fee for the period prior to 25th October, 1989.

When these appeals against the said decision came up for

hearing in this Court a Division Bench vide its order dated

26th April, 1994 in Hindustan Sugar Mills Ltd. vs. State

of U.P. & Others observed that the directions and

observations made in the second Synthetics case had been

differently construed by Benches of this Court. In view of

this apparent conflict these appeals were referred to a

larger Bench. It is in pursuance thereto that these appeals

have been heard.

It was contended by Shri K.K. Venugopal, learned senior

counsel for the appellants, that in respect of industrial

alcohol the State Legislature had no legislative competence

to levy excise duty or any tax in that nature. Drawing our

attention to Entry 8 and 51 of List II, he submitted that

the State can impose excise duty only on potable liquor.

Corresponding to that is Entry 84 in List I which enables

the Parliament to levy excise duty except in regard to those

items referred to in Entry 51 of List II. Furthermore under

Entry 52 of List I the I.D.R. Act had been promulgated by

the Parliament and in the First Schedule Item No. 26

related to fermentation industries. In respect of the

industries referred to in the First Schedule to the I.D.R.

Act it is only the Parliament which has jurisdiction to levy

taxes in respect thereto. As such levy of vend fee on

industrial alcohol by the States was not valid.

It is also submitted that Article 162 provides that the

executive power of a State is co-extensive with its

legislative power. Inasmuch as a State cannot levy excise

duty on industrial alcohol being outside the ambit of Entry

51 of List II, the State Government cannot, in exercise of

its executive power, recover the excise duty. After 25th

October, 1989 law ceased to exist in respect of levy and

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collection of excise duty on industrial alcohol by reason of

want of legislative competence. As such the State

Government could not exercise executive power and collect

excise duty on industrial alcohol.

It was contended that under Article 265 of the

Constitution no tax can be levied or collected without the

authority of law. The submission was that authority of law

means that there should be a lawful enactment which

authorised the levy and collection of tax. Tax cannot be

levied and collected by virtue of a decision of a Court in

the absence of any statutory provision. It was further

submitted that in series of decisions of this Court, one of

the examples being that of M.P.V. Sundararamier & Co. vs.

The State of Andhra Pradesh & Another it had been held that

the law which is declared ultra vires due to lack of

legislative competence would be void ab initio and the same

could not be made operative. The effect of the second

judgment in Synthetics case was that after 25th October,

1989 no levy or collection could take place. In respect of

the period prior to 25th October, 1989 even if tax had been

levied and/or demand raised the contention of the learned

counsel was that the same could not be collected.

On behalf of the respondents it was contended by Shri

Rakesh Dwivedi that declaration of the provisions as being

illegal prospectively meant that prior to 25th October, 1989

all the provisions were valid. He submitted that this meant

that the said provisions were capable of being enforced for

the period prior to the said date. He contended that

liability to pay vend fee gets attracted the moment

industrial alcohol is issued. Since this was issued during

the period 31st May, 1979 and 25th October, 1989 the

appellants had become liable to pay vend fee. Once this

liability prior to 25th October, 1989 is held to be valid

then the State was entitled to collect the same. He

strongly relied on the reasoning of the High Court which had

observed that it would be unreasonable if the observations

in the second Synthetics case were understood as entitling

the appellants to retain the vend fee despite prospective

overruling because those who have paid the vend fee for the

same period would stand in a disadvantageous position when

compared to those who did not pay the vend fee in view of

the interim orders although in both the cases liability to

tax arises at the time of issuance of the alcohol. Such an

interpretation, it was contended, would be arbitrary and

violative of Article 14 of the Constitution.

The doctrine of prospective overruling was simply based

on equity and full effect must be given thereto and the

State should be permitted to recover the unpaid levy in

respect of the period prior to 25th October, 1989. Shri

Dwivedi further submitted that in any case payments which

have been made under the interim orders of the High Court

could be retained by the State and this clearly flows from

the directions of this Court in paragraph 89 of the judgment

in second Synthetics case. The learned counsel, of course,

contended that even in respect of amounts secured by bank

guarantee the State would be entitled to collect the same.

In the present case the State of Uttar Pradesh, like

some other States, had levied vend fee in respect of

industrial alcohol under the U.P. Excise Act, 1910. The

validity of the same was challenged and a Division Bench of

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this Court in State of U.P. and Others (supra) had upheld

its validity. Subsequently a review petition was filed in

respect of the said judgment and another Writ Petition No.

182 of 1980 was also filed by Synthetics & Chemicals Ltd.

challenging a notification dated 31st August, 1979 whereby a

new rule was introduced, in place of existing one, providing

for levy of vend fee. This was challenged and a Bench of

Seven Judges in Synthetics and Chemicals Ltd. and Others

(supra) in paragraph 82 recorded its conclusion that the

relevant provisions of the U.P. Act and similar Acts of

Andhra Pradesh, Tamil Nadu and Bombay were unconstitutional

insofar as these purported to levy a tax or charge impost

upon industrial alcohol, namely, alcohol used and usable for

industrial purposes.

Having come to the conclusion that the levy was

unconstitutional the Court, as far as the relief was

concerned, observed as follows:

89. We must, however, observe, that these imposts and

levies have been imposed by virtue of the decision of this

Court in Synthetics & Chemicals Ltd. case. The States as

well as the petitioners and manufacturers have adjusted

their rights and their position on that basis except in the

case of State of Tamil Nadu. In that view of the matter, it

would be necessary to state that these provisions are

declared to be illegal prospectively. In other words, the

respondents States are restrained from enforcing the said

levy any further but the respondents will not be liable for

any refund and the tax already collected and paid will not

be refunded. We prospectively declare these imposts to be

illegal and invalid, but do not affect any realisations

already made. The writ petitions and the appeals are

disposed of accordingly. The review petitions, accordingly,

succeed though strictly no grounds as such have been made

out but in view we have taken, the decision in the

Synthetics & Chemicals Ltd. case cannot be upheld. In the

view we have taken also, it is not necessary to decide or to

adjudicate if the levy is valid as to who would be liable,

that is to say, the manufacturer or the producer or the

dealer.

90. With regard to Writ Petition No. 4051 of 1978

(Chemicals & Plastics India Ltd. v. State of Tamil Nadu),

certain orders were passed by this Court on November 1,

1978, September 1, 1986, October 1, 1986 and October 10,

1986. It is stated that the present demand of the Central

Excise Department from March 1, 1986 on alcohol manufactured

by the company in their captive distillery is over Rs. 4

Crores. This Court by its order dated October 1, 1986 as

confirmed on October 16, 1986 had permitted the State

Government to collect the levy on alcohol manufactured in

company's captive distillery subject to adjustment of

equities and restrained the central excise authorities from

collecting any excise duty on such alcohol. It is,

therefore, necessary to declare that in future no further

realisation will be made in respect of this by the State

Government from the petitioners. So far as the past

realisations made are concerned, we direct that this

application for that part of the direction, should in

accordance with our decision herein be placed before a

Division Bench for disposal upon notice both to the State

Government and the Central Government.

It is contended on behalf of the appellants that the

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declaration in paragraph 82 of the said judgment that the

impugned provisions of the said Acts were unconstitutional

was a declaration by this Court under Article 141 of the

Constitution. The observations and the directions contained

in paragraphs 89 and 90 supra indicated the exercise of the

Courts jurisdiction under Article 142.

In the present case in respect of the period prior to

25th October, 1989, when the second Synthetics case was

decided in respect of the appellants, demand had been raised

under the impugned Acts and for some period payment had been

made and in respect of other periods payment to the State

Governments had not been made. The contention of the

appellants is that in view of the observations of this Court

in paragraph 89 the appellants may not be entitled to claim

refund of the taxes already paid but, at the same time, the

State Government is not entitled to collect the taxes in

respect of the period prior to 25th October, 1989, i.e. the

date on which the judgment was delivered. It was, however,

submitted that in those cases where money was deposited with

the State on the condition that the same will be kept in a

separate account and would be subject to the outcome of the

writ petition, the appellants would be entitled to refund

thereof.

Shri R.F. Nariman, learned senior counsel for the

appellants referred to Supreme Court Bar Association vs.

Union of India and Another (at page 430) and contended that

under Article 142 of the Constitution this Court cannot pass

any order which is contrary to any constitutional or

statutory provision. The effect of the decision in

Synthetics case being that the impugned Acts were without

legislative competence and those laws must be regarded as

nonest as if they did not exist. The validity of the said

laws which had earlier been upheld in the first Synthetics

case got wiped out with a review petition against the first

Synthetics case being allowed and the declaration of law in

the Synthetics case. He contended that the directions given

in paragraph 89 was to do complete justice in exercise of

the power under Article 142 and the effect of prospective

overruling was clearly specified in the said para where it

is observed that in other words, the respondents States are

restrained from enforcing the said levy any further but the

respondents will not be liable for any refund and the tax

already collected and paid will not be refunded.

It was also submitted by Shri Nariman that there is no

jurisprudential basis for applying the doctrine of

prospective overruling in India. He submitted that this

doctrine was first invoked in I.C. Golak Nath & Ors. vs.

State of Punjab & Anrs. where Chief Justice K. Subba Rao

for himself and five other judges invoked an American

doctrine to that effect. Shri Nariman contended that the

other six judges did not subscribe to this and in fact three

of the judges through the judgment of Justice Wanchoo

expressly came to the conclusion that the doctrine of

prospective overruling was against the provisions of Article

13(2) of the Constitution. In our opinion it is not

necessary nor appropriate for us to go into this question.

We are only concerned with the interpretation and effect of

the Second judgment in Synthetics case and not with regard

to the correctness of the same.

It was contended by Shri Nariman that the vend fee which

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was deposited in Court consequent on the interim order

passed in respect thereto clearly stipulated that the same

should be kept in a separate account. He, therefore,

submitted that this cannot be regarded as a payment the

refund of which the appellant was not entitled to by reason

of the aforesaid observations in the second Synthetics &

Chemicals judgment. He contended that the direction, that

the amount received by the State should be kept in a

separate account, entitled the appellants to get back the

said amount once it was held that the State Legislature

lacked legislative competence to impose such a levy. He

further submitted that in any case the High Court was wrong

in coming to the conclusion that there was any unjust

enrichment and, therefore, there should be no refund of the

levy in question.

Shri Sunil Gupta appearing on behalf of Hindustan

Polymers Ltd. while reiterating the submissions of other

counsel further contended that furnishing of a bank

guarantee does not tantamount to payment of tax. He invited

our attention to the decision of this Court in the case of

Oswal Agro Mills Ltd. and Another vs. Asstt. Collector of

Central Excise, Division Ludhiana and Others . In that

case, pursuant to an interim order passed by this Court

staying the recovery of excise duty a bank guarantee had

been furnished. The assessees appeal was allowed and it

claimed the refund of the bank guarantee which had already

been encashed by the excise authorities. The Revenue

contended that the bank guarantee should be deemed to have

been an equivalent to money deposited in Court and as such

Section 11-B of the Excise Act stood attracted and the

appellants having failed to establish before the authorities

concerned that they had not passed on the incidence thereof

to the customers, the authorities were entitled to encash

the bank guarantee and retain the amount thereof. Allowing

the appeal and holding that the provisions of Section 11-B

were not applicable in the case of furnishing of the bank

guarantee, this Court observed as follows:

9. Section 11-B applies when an assessee claims refund

of excise duty. A claim for refund is a claim for

repayment. It presupposes that the amount of the excise

duty has been paid over to the excise authorities. It is

then that the excise authorities would be required to repay

or refund the excise duty.

10. The question, therefore, is whether it can be said

that the furnishing of a bank guarantee for all or part of

the disputed excise duty pursuant to an order of the court

is equivalent to payment of the amount of the excise duty.

In our view, the answer is in the negative. For the

purposes of securing the revenue in the event of the revenue

succeeding in proceedings before a court, the court, as a

condition of staying the demand for the disputed tax or

duty, imposes a condition that the assessee shall provide a

bank guarantee for the full amount of such tax or duty or

part thereof. The bank guarantee is required to be given

either in favour of the principal administrative officer of

the court or in favour of the revenue authority concerned.

In the event that the revenue fails in the proceedings

before the court the question of payment of the tax or duty,

the amount of which is covered by the bank guarantee, does

not arise and, ordinarily, the court, at the conclusion of

its order, directs that the bank guarantee shall stand

discharged. Where the revenue succeeds the amount of the

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tax or duty becomes payable by the assessee to the revenue

and it is open to the revenue to invoke the bank guarantee

and demand payment thereon. The bank guarantee is security

for the revenue, that in the event the revenue succeeds its

dues will be recoverable, being backed by the guarantee of a

bank. In the event, however unlikely, of the bank refusing

to honour its guarantee it would be necessary for the

revenue or, where the bank guarantee is in favour of the

principal administrative officer of the court, that officer

to file a suit against the bank for the amount due upon the

bank guarantee. The amount of the disputed tax or duty that

is secured by a bank guarantee cannot, therefore, be held to

be paid to the revenue. There is no question of its refund

and Section 11-B is not attracted.

When this Court decided in I.C. Golak Naths case that

the power of amendment under Article 368 of the Constitution

did not allow Parliament to abridge the fundamental rights

in Part III of the Constitution, it made the decision

operative with prospective effect. This was done in

recognition of the fact that between the coming into force

of the Constitution on 26th January 1950 and the date of the

judgment, Parliament had in fact exercised the power of

amendment in a way which, according to the decision in

Golaknath was void. If retrospectivity were to be given to

the decision, it would introduce chaos and unsettled

conditions in our country. On the other hand it also

recognised that such possibility of chaos might be

preferable to the alternative of a totalitarian rule. The

Court, therefore, sought to evolve some reasonable

principle to meet this extraordinary situation. The

reasonable principle which was evolved was the doctrine of

prospective overruling.

Although the doctrine of prospective overruling, was

drawn from American jurisprudence, it has/had, of necessity,

to develop indigenous characteristics. The parameters of

the power as far as this country is concerned were sought to

be laid down in Golaknath itself when it was said:

As this Court for the first time has been called upon

to apply the doctrine evolved in a different country under

different circumstances, we would like to move warily in the

beginning. We would lay down the following propositions:

(1) The doctrine of prospective over-ruling can be invoked

only in matters arising under our Constitution; (2) it can

be applied only by the highest court of the country, i.e.,

the Supreme Court as it has the constitutional jurisdiction

to declare law binding on all the courts in India; (3) the

scope of the retroactive operation of the law declared by

the Supreme Court superseding its earlier decisions is left

to its discretion to be moulded in accordance with the

justice of the cause or matter before it.

The parameters have not been adhered to in practice.

The word prospective overruling implies an earlier

judicial decision on the same issue which was otherwise

final. That is how it was understood in Golaknath.

However, this Court has used the power even when deciding on

an issue for the first time. Thus in India Cement Ltd. and

Others vs. State of Tamil Nadu and Others , when this Court

held that the cess sought to be levied under Section 115 of

the Madras Panchayats Act, 1958 as amended by Madras Act 18

of 1964, was unconstitutional, not only did it restrain the

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State of Tamil Nadu from enforcing the same any further, it

also directed that the State would not be liable for any

refund of cess already paid or collected.

This direction was considered in Orissa Cement Ltd. vs.

State of Orissa and Others at page 498 where it was held

that:

. The declaration regarding the invalidity of a

provision and the determination of the relief that should be

granted in consequent thereof are two different things and,

in the latter sphere, the Court has, and must be held to

have, a certain amount of discretion. It is a well settled

proposition that it is open to the Court to grant, mould or

restrict the relief in a manner most appropriate to the

situation before it in such a way as to advance the

interests of justice. It will be appreciated that it is not

always possible in all situations to give a logical and

complete effect to a finding..

Again in Union of India and Others vs. Mohd. Ramzan

Khan , it was held that non-furnishing of a copy of the

inquiry report to an employee amounted to violation of the

principles of natural justice and any disciplinary action

taken without furnishing such report was liable to be set

aside. However, it was made clear that the decision would

have prospective application so that no punishment already

imposed would be open to challenge on this count. (See also

Managing Director, ECIL, Hyderabad and Others vs. B.

Karunakar and Others .

In the ultimate analysis, prospective overruling,

despite the terminology, is only a recognition of the

principle that the court moulds the reliefs claimed to meet

the justice of the case justice not in its logical but in

its equitable sense. As far as this country is concerned,

the power has been expressly conferred by Article 142 of the

Constitution which allows this Court to pass such decree or

make such order as is necessary for doing complete justice

in any cause or matter pending before it. In exercise of

this power, this Court has often denied the relief claimed

despite holding in the claimants favour in order to do

complete justice.

Given this constitutional discretion, it was perhaps

unnecessary to resort to any principle of prospective

over-ruling a view which was expressed in Narayanibai vs.

State of Maharashtra & Others at page 470 and in Ashok Kumar

Gupta and Another vs. State of U.P. and Others . In the

latter case, while dealing with the doctrine of prospective

overruling, this Court said that it was a method evolved by

the Courts to adjust competing rights of parties so as to

save transactions whether statutory or otherwise, that were

effected by the earlier law. According to this Court, it

was a rule of judicial craftsmanship with pragmatism and

judicial statesmanship as a useful outline to bring about

smooth transition of the operation of law without unduly

affecting the rights of the people who acted upon the law

operated prior to the date of the judgment overruling the

previous law. Ultimately, it is a question of this Courts

discretion and is, for this reason, relatable directly to

the words of the Court granting the relief.

Reading the two paragraphs 89 and 90 together it does

appear that this Court regarded the declaration of the

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provisions being illegal prospectively as only meaning that

if the States had already collected the tax they would not

be liable to pay back the same. It is the States which were

protected as a result of the declaration for otherwise on

the conclusion that the impugned Acts lacked legislative

competence the result would have been that any tax collected

would have become refundable as no State could retain the

same because levy would be without the authority of law and

contrary to Article 265 of the Constitution. At the same

time, it was clearly stipulated that the States were

restrained from enforcing the levy any further. The words

used in Article 265 are levy and collect. In taxing

statute the words levy and collect are not synonymous

terms, (refer to Assistant Collector of Central Excise,

Calcutta Division vs. National Tobacco Co. of India Ltd.

at page 572, while levy would mean the assessment or

charging or imposing tax, collect in Article 265 would

mean the physical realisation of the tax which is levied or

imposed. Collection of tax is normally a stage subsequent

to the levy of the same. The enforcement of levy could only

mean realisation of the tax imposed or demanded. That the

States were prevented to recover the tax, if not already

realised, in respect of the period prior to 25th October,

1989 is further evident from paragraph 90 of the judgment.

The said paragraph shows that as on the date of the judgment

for the period subsequent to 1st March, 1986 the demand of

the Central Excise Department on the alcohol manufactured

was over Rs. 4 Crores. The Court referred to its orders

dated 1st October, 1986 and 16th October, 1986 whereby the

State Government was permitted to collect the levy on

alcohol manufactured in the companys distilleries. With

respect to the said amount of Rs. 4 Crores, it was observed

that it is, therefore, necessary to declare that in future

no further realisation will be made in respect of this by

the State Government from the petitioners. The implication

clearly was that if out of Rs. 4 Crores the State

Government had collected some levy the balance outstanding

cannot be collected after 25th October, 1989.

After the decision in second Synthetics case Writ

Petition Nos. 7452 of 1981 and 3571 of 1982 - Sachid

Hussain & Anr. vs. The State of U.P. & Ors. - came up

for hearing. A Bench of Three Judges presided over by Chief

Justice Mukherji, who had delivered the judgment in second

Synthetics case vide order dated 26th February, 1990

disposing of the said writ petitions observed as follows:

In view of the judgement of this Court in Synthetics

and Chemicals Limited and Others vs. State of Uttar Pradesh

1990 (1) SCC 109, these writ petitions are allowed

prospectively and the levy is declared to be bad

prospectively. Since no refund is claimed, there will be an

order in terms of prayers (1) and (2) of the writ petitions

viz. the recovery order issued by the Excise Inspector

dated 14th September, 1981 for a sum of Rs.68,200/- against

the petitioners are quashed and the respondents are directed

not to recover the amount of Rs.68,200/- from the petitioner

towards vend fee for the period from 9.4.75 to 11.7.78.

To the same effect is another order dated 12th March,

1990 again by a Bench presided over by Chief Justice

Mukherji in Writ Petition No. 8435 of 1981 - Yawar Ali vs.

The State of U.P. & Ors. By these two orders the State of

U.P. was directed not to recover the amounts outstanding

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despite recovery notices having been issued on a date prior

to 25th October, 1989. These two orders are important

inasmuch as the author of the judgment in second Synthetics

case understood his own decision of prospective overruling

to imply that if a levy in respect of the period earlier

than 25th October, 1989 has not been recovered by the excise

authorities then notwithstanding a recovery order having

been issued the State was not entitled to recover the

amount. It can be said that in 1990 Chief Justice Mukherji,

along with two companion Judges interpreted his earlier

decision in a manner which clearly showed that paragraph 89

of the judgment in the second Synthetics case could not

entitle the State to physically receive any amount in

respect of the levy for the period prior to 25th October,

1989 even though it could be said that the levy before that

date was not invalid because of the doctrine of prospective

overruling.

The doctrine of prospective overruling was applied in

Belsund Sugar Co. Ltd. vs. State of Bihar and Others .

The question which arose for consideration there was whether

market fee could be levied under the Bihar Agriculture

Produce Markets Act, 1960 in respect to transactions of

purchase of sugarcane, sugar and molasses by sugar mills.

In view of the provisions of the Bihar Sugarcane (Regulation

of Supply and Purchase) Act, 1981 read with Sugar (Control)

Order, 1966 issued under the Essential Commodities Act, it

was held that the provisions of the Sugarcane Act and the

Sugarcane Order, on the one hand, and the Bihar Market Act

on the other could not operate harmoniously and, therefore,

the Sugarcane Act and the Sugarcane Order prevailed over the

Market Act. It was then contended that the appellants

therein should be allowed to get refund of the market fee

which they had paid under the Market Act subject to their

showing that they had not passed on the burden on the

principle of unjust enrichment. Dealing with the above

contentions, it was observed as follows:

112. .Under these circumstances, keeping in view the

peculiar facts and circumstances of these cases, we deem it

fit to direct in exercise our powers under Article 142 of

the Constitution of India that the present decision will

have only a prospective effect. Meaning thereby that after

the pronouncement of this judgment all future transactions

of purchase of sugarcane by the sugar factories concerned in

the market areas as well as the sale of manufactured sugar

and molasses produced by therefrom by utilising this

purchased sugarcane by these factories will not be subjected

to the levy of market fee under Section 27 of the Market Act

by the Market Committees concerned. All past transactions

up to the date of this judgment which have suffered the levy

of market fee will not be covered by this judgment and the

collected market fees on these past transactions prior to

the date of this judgment will not be required to be

refunded to any of the sugar mills which might have paid

these market fees.

113. However, one rider has to be added to this

direction. If any of the Market Committees has been

restrained from recovering market fee from the writ

petitioners in the High Court or if any of the writ

petitioners in the High Court has, as an appellant before

this Court, obtained stay of the payment of market fee, then

for the period during which such stay has operated and

consequently market fee was not paid on the transactions

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covered by such stay orders, there will remain no occasion

for the Market Committee concerned to recover such market

fee from the sugar mill concerned after the date of this

judgment even for such past transactions. In other words,

market fees paid in the past shall not be refunded.

Similarly market fees not collected in the past also shall

not be collected hereafter. The impugned judgments of the

High Court in this group of sugar matters will stand set

aside as aforesaid. The writ petition directly filed before

this Court also will be required to be allowed in the

aforesaid terms.

The aforesaid observations make clear what was implicit

in paragraph 89 of the second Synthetics case, namely, that

where payment has not actually been made to the Market

Committee for a period prior to the announcement of the

judgment, by reason of the assessee having obtained a stay,

the Market Committee was not entitled to recover the market

fee, payment of which had been stayed. It was pithily put

in Belsund Sugar Co. Ltd.s case (supra) that "in other

words market fees paid in the past was not to be refunded.

Similarly market fees not collected in the past was not to

be collected hereafter. These observations are in

consonance with the directions given in paragraph 89 of the

judgment in second Synthetics case and applying the said

principles to the present appeals the only conclusion which

can be arrived at is that this Court intended the status quo

as on 25th October, 1989 to be maintained as regards actual

payment or levy was concerned. What had gone to the coffers

to the Government with or without any string attached, was

to remain with it and what was not received could not be

realised by the Government.

It is, of course, true that in respect of the same

period i.e. prior to 25th October, 1989 persons who had

obtained stay orders or had otherwise not paid the levy

would be better off than those who have deposited the sums

with the Government and are not entitled to receive any

refund. This situation, however, is unavoidable for the

simple reason that Article 265 does not permit collection of

tax without the authority of law. Even though levy prior to

25th October, 1989 may be valid but when in fact no

collection was made pursuant to the said levy, then post

judgment in the second Synthetics case collection is not

permissible. After 25th October, 1989 there was no valid

law in existence which permitted the collection of tax.

Shri Venugopal is right in contending that after 25th

October, 1989 the provisions of Section 39 of the U.P.

Excise Act, 1910 which provides for recovery of excise

revenue would be inapplicable. The said section inter alia

states that all excise revenue may be recovered from the

person primarily liable to pay the same, as arrears of land

revenue or in the manner provided for the recovery of public

demands by any law for the time being in force. Section

3(1) defines excise revenue as meaning revenue derived or

derivable from any duty if the taxes etc. imposed or

ordered under the provisions of the Act or of any other law

for the time being in force. Section 3(3a) defines excise

duty and countervailing duty as meaning any such excise

duty or countervailing duty, as may be mentioned in Entry 51

of List II of the Seventh Schedule of the Constitution.

There can be no excise duty under the U.P. Excise Act on

industrial alcohol because that would be outside the ambit

of Entry 51 of List II of the Seventh Schedule. Vend fee

being regarded as excise duty on industrial alcohol which is

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not valid as not falling under Entry 51 of List II cannot be

regarded as excise revenue and, therefore, at least after

25th October, 1989 it would be unrecoverable being outside

the purview of the Section 39 of the U.P. Excise Act, 1910.

This would clearly be the position as a result of the Court

having declared relevant provisions of the U.P. Act as

being ultra vires insofar as it enables the imposition of

excise duty on industrial alcohol.

Furthermore in view of the enunciation of the law by

this Court in Oswal Agro Mills Ltd. case (supra), a bank

guarantee which is furnished cannot be regarded as payment

of excise levy which the Government is entitled to retain.

The furnishing of a bank guarantee is ordered normally in

order to ensure collection of dues. Where, however, the

State, as in the present case, has been held not to be

entitled to collect or realise vend fee after 25th October,

1989 it cannot be allowed to invoke the bank guarantee and

realise the amount of vend fee. What cannot be done

directly cannot be done indirectly either. Furnishing of

bank guarantee is only a promise by the bank to pay to the

beneficiary the amount under certain circumstances contained

in the bank guarantee. Furnishing of bank guarantee cannot

tantamount to making of payment as it was to avoid making

payment of the vend fee that bank guarantees were issued.

The respondents, in other words, are not entitled to encash

the bank guarantees and realise vend fee in respect of the

period prior to 25th October, 1989.

It is true that the effect of a legislation without

legislative competence is that it is nonest. [See: Behram

Khurshed Pesikaka vs. The State of Bombay at 652, 653,

R.M.D. Chamarbaugwalla vs. The Union of India at 940,

M.P.V. Sundararamier & Co. vs. The State of Andhra

Pradesh & Another (supra) at 1468 and Mahendra Lal Jaini vs.

The State of Uttar Pradesh and Others at 937-941.]

Nevertheless a law enacted without legislative

competence remains on the statute book till a Court of

competent jurisdiction adjudicates thereon and declares it

to be void. When the Court declares it to be void it is

only then that it can be said that it is nonest for all

purposes. In Synthetics and Chemicals case the invalidity

of the provisions was a declaration under Article 141 of the

Constitution. It was for doing complete justice that the

Court in exercise of its jurisdiction under Article 142

moulded the relief in such a way as to give effect to its

declaration prospectively. It is not possible to accept

that such an order of prospective overruling is contrary to

law. An invalid law has not been held to be valid. All

that has happened is that the declaration of invalidity of

the legislation was directed to take effect from a future

date.

The principle of prospective over-ruling is too well

enshrined in our jurisprudence for it to be disturbed.

Therefore, by reason of the decision in second Synthetics

case what has actually happened is collection and

non-collection of vend fee prior to 25th October, 1989 is

left untouched. However, the Court in the second Synthetics

case did not specifically deal with the question of deposits

made pursuant to interim orders of Courts. The word used

there was realisation. It might have been arguable that

the deposits were not realisations in the sense the word

has been used in taxation statutes in general and the

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U.P.Excise Act, 1910 in particular. However, the interim

orders passed by the High Court show that deposits were made

of vend fee and the purchase tax. Although these deposits

were to be kept in a separate account, nevertheless in the

circumstances of this case, it would be mere sophistry to

hold that the monies so deposited were not realisations

for the purposes of the U.P. Excise Act. Therefore, what

was deposited by the appellants with the State would remain

with it notwithstanding, the interim orders which required

the State to keep it in a separate account but, at the same

time, what has not been collected by the State cannot be

realised by it, even in those cases where a bank guarantee

had been furnished.

Lastly, while relying on Mafatlal Industries Ltd. and

Others vs. Union of India and Others , Shri Dwivedi

submitted that the appellants had realised the amount of

vend fee payable by taking that figure into account while

determining their sale price and, therefore, the State is

entitled to recover the same as it would otherwise result in

unjust enrichment to the appellants.

In Mafatlals case (supra) the principle of unjust

enrichment was invoked as refund was claimed even though the

amount of excise duty paid had already been recovered. This

principle resulted in the court declining to order refund.

The principle of unjust enrichment does not apply in the

present case, in view of the direction given in second

Synthetics case (supra) that no refund be given. This is in

line with the principle of unjust enrichment. But that

principle cannot be extended to give a right to the State to

recover or realise vend fee after the statute has been

struck down and it has been categorically stated that the

respondent States are restrained from enforcing the said

levy any further.. The contention of the respondents in

the teeth of the aforesaid direction cannot, therefore, be

accepted. This is apart from the fact that there is no

factual basis on which this Court can conclude that the

appellants have in fact realised the amount of vend fee and

allowing them to retain it will result in their getting

enriched unjustly.

For the aforesaid reasons, C.A. No. 4093 of 1991 is

allowed. Civil Appeal No. 2853 of 2001 is dismissed. It

is declared that the vend fee realised by the States is not

to be refunded to the appellants and, at the same time, the

State cannot collect any vend fee for the period prior to

25th October, 1989 or thereafter notwithstanding that

notices of demand may have been issued or recovery

proceeding initiated. Parties to bear their own costs.

C.A. Nos. 324 of 1981, 455, 2795, 1604 of 1980, 624,

625, 125, 2049 of 1981, C.A. Nos. 1122, 181 of 1981, SLP

(C) Nos. 4181, 4297-4298 of 1980, C.A. Nos. 215, 341 of

1981, T.C. Nos. 37-39 of 1989, C.A. Nos. 2777 of 1981

and 1607 of 1980

In these appeals apart from the points decided by the

judgment in Somaiyas case (Civil Appeal No. 4093 of 1991),

one of the issues which arises pertains to the validity of

the export pass fee sought to be levied and realised by the

State. Counsel for the parties agree that this and other

issues, not covered by the judgment in Somaiyas case, can

now be decided by an appropriate Bench.

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_________________________________________________________________________________

RUMA PAL, J.

While I respectfully concur with the reasoning and

conclusions reached by my learned brother Kirpal, J., I wish

to add my views on an aspect of the prospective

over-ruling which was sought to be effected by the decision

of the Constitution Bench of this Court in Synthetics and

Chemicals Ltd. and Others vs. State of U.P. and others

1990 (1) SCC 109.

One of the arguments of the appellant as noted by my

learned brother was that the Court in the Synthetics case

by resorting to prospective over-ruling had in a fact sought

to uphold a law upto the period of the judgment which law

had held to have been passed without competence. It is

submitted that the finding that the States were not

competent to levy tax on industrial alcohol meant that the

State Acts were non est and that the Court could not by

giving prospective effect to its judgment breathe life into

a dead statute up to the date of the judgment. It was also

contended by the appellant that even under Article 142, the

Court could not whittle down or act in derogation of any

constitutional provision. By declaring that the statute was

valid up to the date of the judgment, according to the

appellant, the specific constitutional provisions, namely,

Articles 246 and Article 245 were infringed. Reliance has

been placed on the decision of this Court in Prem Chand Garg

vs. Excise Commissioner, U.P., Allahabad 1963 (1) SCR 885

and Supreme Court Bar Association V. Union of India and

Another 1998 (4) SCC 409.

The argument of the appellant proceeds on a

misunderstanding of the effect of prospective over-ruling.

As has been elaborately stated in my learned brothers

judgment, by prospective over-ruling the Court does not

grant the relief claimed even after holding in the

claimants favour. In this case, the Court held that the

statutory provision imposing vend fee was invalid. Strictly

speaking, this would have entitled the appellant to a refund

from the respondents of all amounts collected by way of vend

fee. But because, as stated in the Synthetics decision

itself, over a period of time imposts and levies had been

imposed by virtue of the earlier decision and that the

States as well as the petitioners and manufacturers had

adjusted their rights and their positions on that basis,

this relief was denied. The Court did not, by denying the

relief, authorise or validate what had been declared to be

illegal or void nor did it imbue the legislature with

competence upto the date of the judgment.