REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1541 OF 2009

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

V.K. ASHOKAN …

APPELLANT

Versus

ASSTT. EXCISE COMMNR. & ORS. … RESPONDENTS

WITH

CIVIL APPEAL NO. 1542 OF 2009

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

V.K. ASHOKAN …

APPELLANT

Versus

ASSTT. EXCISE COMMISSIONER & ORS. … RESPONDENTS

WITH

CIVIL APPEAL NO.1543 OF 2009

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

P.K. RAJAN … APPELLANT

Versus

ASSTT. EXCISE COMMNR. & ORS. … RESPONDENTS

2

WITH

CIVIL APPEAL NO. 1544 OF 2009

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

THANKAM RAMAKRISHNAN … APPELLANT

Versus

ASSISTANT EXCISE COMMISSIONER

& ORS. … RESPONDENTS

WITH

CIVIL APPEAL NO. 1545 OF 2009

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

T.P. SALEEM & ANR. …

APPELLANTS

Versus

STATE OF KERALA & ORS. … RESPONDENTS

WITH

CIVIL APPEAL NO. 1546 OF 2009

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

K.C. RAJAN … APPELLANT

Versus

STATE OF KERALA & ORS. … RESPONDENTS

WITH

3

CIVIL APPEAL NO. 1547 OF 2009

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

THANKAM RAMAKRISHNAN … APPELLANT

VERSUS

ASSISTANT EXCISE COMMISSIONER

& ORS. … RESPONDENTS

J U D G M E N T

S.B. SINHA, J.

1.Leave granted.

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

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

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

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

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

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

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

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

4

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

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

individual cases also.

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

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

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

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

and the other relevant dates would appear from the following:

Sl.

No

.

S.L.P. No.Licencee of

Shop Nos.

& Excise

Range

Date of

cancellation

of Licence

Rule

under

which

licence is

cancelled

Details of

Writ

Petition

filed before

the High

Court by

the

petitioners

Details of

Criminal

Case

1.25060 of

2005

(V.K.

Ashokan)

Licencee of

Shop Nos.

55 to 96 of

Thrissur

Excise

Range

26.09.1997

vide order of

Assistant

Excise

Commissione

r

Rule 6

(30) of

the

Abkari

shops

(Disposa

l in

Auction)

Rules.

Writ

Petition

O.P. No.

5742 of

1998

dismissed

by the

judgment

impugned

in the

S.L.P.

Accused

No. 1 in

S.C. No.83

of 1999 –

acquitted

by the

Sessions

Judge by

judgment

dated

16.05.2008

.

5

2.25467 of

2005

(V.K.

Ashokan)

Licencee of

Shop Nos.

109 to 222

of

Irinjalakuda

Excise

Range

27.10.1997

vide order of

the Assistant

Excise

Commissione

r

Rule 6

(28) of

the

Abkari

shops

(Disposa

l in

Auction)

Rules.

Writ

Petition

O.P. No.

6609 of

1998 –

judgment

of Single

Judge on

21.07.1989

. Writ

Appeal No.

1822 of

1998

dismissed

by the

impugned

judgment

in this

S.L.P.

Accused

No. 2 in

S.C.

No.210 of

1999 –

acquitted

by

judgment

dated

16.05.2008

3.1568 of

2006

(P.K.

Rajan)

Licencee of

Shop Nos. 1

to 54 of

Cherpu

Excise

Range

26.09.1997

vide order of

the Assistant

Excise

Commissione

r

Rule 6

(30) of

the

Abkari

shops

(Disposa

l in

Auction)

Rules.

Writ

Petition

O.P. No.

5910 of

1998

dismissed

by the

judgment

impugned

in this

S.L.P.

Accused

No. 2 in

S.C.

No.293 of

1999 –

acquitted

by

judgment

dated

15.11.2005

.

6

4.1773 of

2006

(T.P.

Saleem)

Licencee of

Shop Nos. 1

to 52 and

137 & 138

of

Vadanapall

y Excise

Range

25.05.1998

vide order of

the Assistant

Excise

Commissione

r

Rule 6

(28) of

the

Abkari

shops

(Disposa

l in

Auction)

Rules.

Writ

Petition

O.P. No.

5783 of

1999

dismissed

by the

judgment

impugned

in the

S.L.P.

No

criminal

case

against him

5.2166 of

2006

(K.C.

Rajan)

Licensee of

Shop Nos.

97 to 171 of

Anthikad

Excise

Range

26.09.1997

vide order of

the Assistant

Excise

Commissione

r

Rule 6

(30) of

the

Abkari

shops

(Disposa

l in

Auction)

Rules.

Writ

Petition

O.P. 10276

of 1998

dismissed

by the

judgment

impugned

in this SLP.

Accused

No. 1 in

S.C. No. 84

of 1999 –

acquitted

by

judgment

dated

02.09.2006

7

6.1696 of

2006

(Thankam

Rama-

krishanan

)

Petitioner is

the widow

of K.V.

Rama-

krishnan

who was a

co-licencee

of shop

Nos. 1 to 54

of Cherpu

Excise

Range

26.09.1997

vide order of

the Assistant

Excise

Commissione

r

Rule 6

(30) of

the

Abkari

shops

(Disposa

l in

Auction)

Rules.

Writ

Petition

O.P. No.

5910 of

1998 –

dismissed

by the

judgment

impugned

in this SLP

Petitioner’s

late

husband

was

accused

No. 3 in

S.C. No.

293 of

1999 which

case ended

in acquittal

by

judgment

dated

15.11.2005

.

7.6091 of

2006

(Thankam

Rama-

krishnan)

Petitioner is

the widow

of K.V.

Rama-

krishnan

who was a

co-licensee

of Shop

Nos. 109 to

222 of

Irinjalakuda

Excise

Range.

27.10.1997

vide order of

the Assistant

Commissione

r

Rule 6

(28) of

the

Abkari

shops

(Disposa

l in

Auction)

Rules.

Writ

Petition

No. 6609

of 1998 –

dismissed

by Single

Judge by

judgment

dated

21.07.1998

. W.A. No.

1790 of

1998

dismissed

by the

judgment

impugned

in this SLP.

Petitioner’s

late

husband

was

accused

No.1 in

S.C. No.

210 of

1999 which

case ended

in acquittal

by

judgment

dated

16.05.2008

.

8

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

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

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

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

notified therefor. We are concerned with shops situate within Thrissur

Range, Irinjalakuda Range, Cherpu Range, Vadanappally Range and

Anthikad Range.

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

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

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

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

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

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

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

to deal in the said commodity only for one year.

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

Appellants upon having declared to be the successful bidders furnished

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

9

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

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

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

common certificate was obtained in respect of all samples stating that

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

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

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

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

9.Separate proceedings were also initiated by the Assistant Excise

Commissioner for cancellation of licenses. Those proceedings, as would

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

Rule 6(30) of the Rules.

Proceeding initiated

under Rule

Range

Civil Appeal @ SLP

(C) No. 25060/2005

6(30) Thrissur

Civil Appeal @ SLP

(C) No. 25467/2005

6(28) Irinjalakuda

Civil Appeal @ SLP

(C) No. 1568/2005

6(30) Cherpu

Civil Appeal @ SLP

(C) No. 1696/2006

6(30) Cherpu

10

Civil Appeal @ SLP

(C) No. 1773/2006

6(28) Vadanappally

Civil Appeal @ SLP

(C) No. 2166/2006

6(30) Anthikad

Civil Appeal @ SLP

(C) No. 6091/2005

6(28) Irinjalakuda

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

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

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

Commissioner for confirmation.

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

Assistant Commissioner of Excise entered into negotiations with some of

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

parties for the remaining period.

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

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

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

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

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

Assistant Commissioner was upheld.

11

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

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

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

“As per order number first cited, the licences of

toddy shops of Cherpu, Thrissur and Anthikad

ranges was cancelled under Rule 6 (30) of Abkari

Shops (Disposal in Auction) Rules 1974, since the

Original purchasers of toddy shops of above

ranges for the year 1997-2000 violated the rules

and licence conditions and committed the offences

punishable under Section 57(a) and 56 of Abkari

Act and also Section 22 of NDPS Act 1985

consequent on the detection of Diazepam in the

samples of toddy sent for chemical analysis from

toddy depot and toddy shops of the above ranges.

Board as per reference 2

nd

cited have ordered that

rule 6(28) of Abkari Shops (Disposal in Auction)

Rules 1974 is automatically attracted in these

cases and uphold the decision of the Asst. Excise

Commissioner, Thrissur of cancellation of the

licence made as per rule 6(30) read with rule 6

(28).

Hence as per rule 6(28) of Abkari Shops (Disposal

in Auction) Rules 1974, the amount of

Rs.58,50,000/- in respect of toddy shops of

Cherpu range, Rs.44,40,000/- in respect of toddy

shops of Thrissur range and Rs.88,50,000/- in

respect of toddy shops of Anthikad range

deposited by the original purchasers of the above

toddy shops as per TR No. 4232, 4230 and 4229

respectively are hereby forfeited to Government

with immediate effect.”

12

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

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

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

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

11.11.1997 and wherefor licences had been granted with effect from

14.11.1997. Revenue Recovery proceedings were initiated under Section 7

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

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

toddy shops specified therein.

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

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

order in Form 11 attaching the immovable properties of the appellants

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

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

writ petition.

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

applications. Two writ appeals were preferred thereagainst. In the

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

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

13

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

judgment.

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

11 of its judgment, which reads as under:

“Counsel submitted that sub-rule (30) of rule 6 of

the Kerala Abkari Shops (Disposal in Auction)

Rules was not in existence prior to 30.3.1996 but

was substituted on 30.3.1996 which has not

conferred any power on the department to cancel

the licence. Sri K. Ramakumar appearing for

some of the licencees submitted that licences were

cancelled without notice to the petitioners and the

principles of natural justice have been violated.

Further counsel also referred to Section 26 of the

Kerala Abkari Act and submitted that only

Commissioner has got the power to cancel the

licence and the cancellation of the licence by

Assistant Commissioner was without jurisdiction.

Identical are the contentions raised by Advocate

Sri. Premjit Nagendran as well. Additional

Advocate General on the other hand supported the

action of the department.”

Holding that the order cancelling the licence having been passed as

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

from the business premises of the appellants and furthermore they having

14

defaulted in payment of kist, committed an offence punishable under

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

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

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

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

“Consequently contention of the counsel that

licence was also for one year and therefore

petitioner cannot be held liable for the rest of the

period cannot be accepted. Respondent State is

legally entitled to recover the loss caused to the

State by issuing demand notice to the petitioners.

We are of the view that the action taken by the

Respondents is perfectly in order and in

accordance with the Kerala Abkari Act and the

Rules framed thereunder.”

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

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

support of these appeals raised the following contentions:

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

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

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

are not envisaged under the statute.

15

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

forfeiture of the amount deposited and the same having been

deleted from the statute book, recourse to the said provision

was wholly impermissible.

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

the agreement was entered into by and between the

Commissioner of Excise and the appellants for a period of three

years, the amount of purported loss could have been calculated

only for the rest of the year.

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

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

that the amount of security furnished would cover the entire

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

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

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

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

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

bound to establish breach of contract on the part of the

16

licensees and consequential entitlement to damages particularly

when the contracts themselves had been terminated.

vi.The Commissioner of Excise could not have confirmed

cancellation of licenses and consequential orders in such cases

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

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

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

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

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

for a period of three years and having entered into agreements

for the said period cannot be permitted to contend that the

contract was for one year.

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

Rules read with conditions of the Agreement as contained in

Form I and Form II appended thereto, the mode of

determination of the quantum of damages being fixed, namely,

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

amount which was payable to the State and the amount which

was offered by the new purchasers together with interest at the

17

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

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

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

not denied or disputed that the appellants executed agreement

for a period of three years.

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

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

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

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

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

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

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

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

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

mean ‘toddy or arrack’.

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

“Toddy” means fermented or unfermented juice

drawn from coconut, palmyra, date, or any other kind of

palm tree.”

18

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

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

“18A.Grant of exclusive or other privilege of

manufacture, etc. on payment of rentals:-(1)

It shall be lawful for the Government to

grant to any person or persons, on such conditions

and for such period as they may deem fit, the

exclusive or other privilege—

(i)of manufacturing or supplying by

wholesale; or

(ii)of selling by retail; or

(iii)of manufacturing or supplying by

wholesale and selling by retail, any

liquor or intoxicating drugs within

any local area on his or their payment

to the Government of an amount as

rental in consideration of the grant of

such privilege. The amount of rental

may be settled by auction, negotiation

or by any other method as may be

determined by the Government, from

time to time, and may be collected to

the exclusion of, or in addition, to the

duty or tax leviable under Sections 17

and 18.

(2)No grantee of any privilege under sub-

section (1) shall exercise the same until he has

received a licence in that behalf from the

Commissioner.

(3)In such cases, if the Government shall by

notification so direct, the provisions of Section 12

19

relating to toddy and toddy producing trees shall

not apply.”

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

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

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

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

“7(2). No toddy other than that drawn from the

Coconut Plamyrah or Choondapana palms shall be

sold by the licensees. All toddy kept or offered for

sale should be of good quality and unadulterated.

Nothing shall be added to it to increase its

intoxicating power or for any other purpose.”

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

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

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

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

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

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

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

20

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

Kerala Board of Revenue Act, 1957.

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

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

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

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

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

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

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

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

between the auction purchaser and the auctioning officer. The auction

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

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

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

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

Assistant Excise Commissioner. The Board of Revenue may direct auction

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

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

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

the confirmation of Board of Revenue.

21

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

specified in the licence by any licensee.

Rule 6(28) reads as under:-

“6(28) Whenever the licensee fails to pay the kist,

tree-tax, duty, etc. due from him for any month

together with, the interest due under sub-rule (25)

on or before the 25

th

day of the month, the

Assistant Excise Commissioner subject to

confirmation by the Board of Revenue may cancel

the licence and order a resale at the risk of the

licensee or direct the management of the business

of the contract by departmental agency or

otherwise dispose of the same. All losses on

account of such cancellation and resale or

Departmental management or other disposal of the

privilege shall be borne by the defaulting licensee,

but he shall have no right to the gain, if any, which

accrues. Disposal otherwise than by resale

includes closure. The whole of the deposit, if any

made at the commencement of the lease shall be

liable to forfeiture. The Departmental

Management fee collected from a shop while it

was under Departmental management due to

default of payment of security, kist, etc. shall be

liable to forfeiture at the discretion of the Excise

Commissioner. The Assistant Excise

Commissioner may, however, allow sales to

continue or make such other arrangements as he

deems fit pending resale or other disposal of the

privilege. Any sum due from a licensee on

account of kist, tree-tax or otherwise may be

recovered from his deposit, if any made by him at

the commencement of the lease or collected under

the Revenue Recovery Act. If any adjustment is

made from the deposit the licensee shall be bound

to replace the sum adjusted from his deposit within

22

fifteen days of receipt of notice from the Excise

Officer in charge of the Division in which his shop

is situated. Interest on account of loss by resale

shall be calculated from the date of confirmation

of the resale of the shop.

Provided that the Assistant Excise

Commissioner concerned may before confirmation

of cancellation by the Board of Revenue, restore

the licence cancelled by him subject to

confirmation by the Board of Revenue, if the

defaulter pays up the amount defaulted by him

before the expiry of one month from the date of

such cancellation.”

Rule 6(30) reads as under:

“6(30) Infraction of any of the rules or the

conditions of the licence either by the licensee or

by any person in his employment shall entail on

the licensee or his agent or both, a fine of Rs.5,000

or cancellation of the licence or both. An officer

of and above the rank of the Assistant Excise

Commissioners shall be competent to impose all or

any of the above penalties:

Provided that if the holder of such licence or

permit, sells or stores for sale liquor in any

premises other than the licenced premises, such

penalty shall not be less than twenty five thousand

rupees.”

23

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

published in Kerala Gazette Extraordinary 514 dated 30.3.1996, prior

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

“6(30) Infraction of any of the conditions of the

licence or of these rules or of the Tree Tax Rules

or any offence committed against the Abkari Act,

with or without the licensed premises either by a

licensee or by any person in his employment shall

entail on the licensee either:-

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

(b)Forfeiture of deposit if any and cancellation of licence

and resale or other disposal of the privilege at the risk of

the licensee. When the licence is thus cancelled the

amount still payable for the reminder of the term of the

licence shall become due at once.”

Rule 6(32) reads as under:

“6(32) Failure on the part of the licensee to pay up

the amount of the fine, if any, imposed upon him

under these clause shall entail on him the

consequence similar to these prescribed in sub-

rule (28) for failure to pay the kist due from him.

Rule 6(34) reads as under:

“6(34). If any licensee is convicted of any offence

under any law for the time being in force relating

to Excise Revenue, the Excise Commissioner may

declare his licence forfeited. If any auction

purchaser had been convicted of any such offence

before a licence is actually issued to him, the

24

Board of Revenue may cancel his contract and

refuse the issue of licence. If the licensee is

convicted under the Penal Code or after the issue

of the licence to him should it transpire that

previous to such issue he was convicted under the

law or was disqualified to hold a shop under sub-

rule (3) Rule 5 such conviction or the

disqualification shall render him liable to

forfeiture of the licence and also the forfeiture of

his deposit, if the offence of which he is convicted

or the disqualification disclosed is such, as in the

opinion of the Board of Revenue renders him unfit

to hold it. When a licence is forfeited under this

sub-rule the privilege shall be resold or otherwise

disposed of at the risk of the licensee.”

Chapter VI of the Rules contains special conditions applicable to

licensees for the privilege of vending toddy in independent shops.

23.The Government of Kerala issued a notification on 6.3.1997

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

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

Cherpu, Vadanappally, Anthikad.

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

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

following terms:

25

“ Please refer to your fax message No. R5-

381/97 dated 17.3.1997 regarding the Abkari

auction held on 17.3.1997.

As the Gazette Notification was only for 97-

98, confirmation can also be only for 97-98,

provided the bidders are willing to pay 1/3

rd

of

total bid amount as rental for 97-98.

For 98-99 and 99-2000 separate

Government approval will be obtained for

extension of agreement at the same rates, without

fresh auction.

If the bidders are willing to accept these

conditions Board of Revenue will confirm the bids

for 97-98 and take action for extension beyond

31.3.1998.

Please confirm the above within 24 hours.”

Pursuant to the above fax message received from the Excise

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

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

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

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

year only.

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

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

26

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

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

considered a little later.

As the said auction was confirmed, appellants started conducting their

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

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

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

of the Rules.

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

of the Rules.

There cannot be any doubt or dispute whatsoever that a proceeding

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

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

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

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

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

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

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

27

Whether the consequence of termination of licence would attract

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

28

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

intention on the part of the Rule making authority.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

29

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

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

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

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

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

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

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

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

permissible.

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

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

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

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

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

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

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

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

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

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

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

30

wherefor proceedings for cancellation of licence was initiated, appellants

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

as the case may be.

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

impermissible for the Assistant Commissioner of Excise to pass the said

31

order dated 19.12.1997 opining that the consequences of forfeiture under

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

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

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

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

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

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

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

provision of law was mentioned or the provision of law incorrectly

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

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

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

administrative law that where two statutory authorities could exercise the

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

have exercised the power.

Furthermore, the nature of power to be exercised by the

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

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

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

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

32

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

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

SCC 26).

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

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

“22.It is, furthermore, not in dispute that Article

14 of the Constitution of India would be attracted

even in the matter of trade in liquor.

25.While imposing terms and conditions in

terms of Section 18A of the Act, the State cannot

take recourse to something which is not within its

jurisdiction or what is otherwise prohibited in law.

Sub-sections (c) and (d) of Section 24 of the Act

provide that every licence or permit granted under

the Act would be subject to such restrictions and

on such conditions and shall be in such form and

contain such particulars as the Government may

direct either generally or in any particular instance

in this behalf. The said provisions are also subject

to the inherent limitations of the statute. Such an

inherent limitation is that rules framed under the

Act must be lawful and may not be contrary to the

legislative policy. The rule making power is

contained in Section 29 of the Act. At the relevant

time, Sub-section (1) of Section 29 of the Act

provided that the government may make rules for

the purpose of carrying out the provisions of the

Act which has been amended by Act No. 12 of

2003 with effect from 1.4.2003 empowering the

State to make rules either prospectively or

retrospectively for the purposes of the Act.”

33

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

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

was held:

“27. The State may have unfettered power to

regulate the manufacture, sale or export-import

sale of intoxicants but in the absence of any

statutory provision, it cannot, in purported

exercise of the said power, direct a particular class

of workers to be employed in other categories of

liquor shops.

28.The Rules in terms of Sub-section (1) of

Section 29 of the Act, thus, could be framed only

for the purpose of carrying out the provisions of

the Act. Both the power to frame rules and the

power to impose terms and conditions are,

therefore, subject to the provisions of the Act.

They must conform to the legislative policy. They

must not be contrary to the other provisions of the

Act. They must not be framed in contravention of

the constitutional or statutory scheme.”

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

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

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

provides for compliance of principles of natural justice as consequence

flowing from an order of cancellation of licence has serious civil

34

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

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

failed to do so.

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

Commissioner of Excise had served notices before the recovery proceedings

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

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

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

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

cancellation of license, administrative discipline would require that it is

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

formality.

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

observed:

“It is common experience that once a decision has

been taken, there is a tendency to uphold it and a

representation may not really yield any fruitful

purpose.”

35

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

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

to be a nominal and sham one.

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

Court held:

“15. Effect of civil consequences arising out of

determination of lis under a statute is stated in

State of Orissa v. Dr. (Miss) Binapani Dei and

Ors. (1967) 2 SCR 625. It is an authority for the

proposition when by reason of an action on the

part of a statutory authority, civil or evil

consequences ensue, principles of natural justice

are required to be followed. In such an event,

although no express provision is laid down in this

behalf compliance of principles of natural justice

would be implicit. In case of denial of principles

of natural justice in a statute, the same may also be

held ultra vires Article 14 of the Constitution.”

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

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

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

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

could not have taken a different view.

36

If only the Assistant Commissioner of Excise had the original

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

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

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

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

initiated by the Assistant Commissioner of Excise and not by the

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

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

own mind and the procedures laid down therefore must be scrupulously

followed.

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

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

“It is a well settled rule of administrative law that

an executive authority must be rigorously held to

the standards by which it professes its actions to

be judged and it must scrupulously observe those

standards on pain of invalidation of an act in

violation of them. This rule was enunciated by Mr.

Justice Frankfurter in Vitarelli v. Seaton (1959)

359 U.S. 535: 3 L Ed. 2d 1012 where the learned

Judge said:

‘An executive agency must be rigorously

held to the standards by which it professes its

action to be judged. Accordingly, if dismissal from

employment is based on a defined procedure, even

37

though generous beyond the requirements that

bind such agency, that procedure must be

scrupulously observed. This judicially evolved

rule of administrative law is now firmly

established and, if I may add, rightly so. He that

takes the procedural sword shall perish with the

sword.’

This Court accepted the rule as valid and

applicable in India in A.S. Ahluwalia v. State of

Punjab (1975) 3 SCR 82: (AIR 1975 SC 984) and

in subsequent decision given in Sukhdev v.

Bhagatram (1975) 3 SCR 619: (AIR 1975 SC

1331), Mathew, J., quoted the above-referred

observations of Mr. Justice Frankfurter with

approval. It may be noted that this rule, though

supportable also as emanation from Article 14,

does not rest merely on that article. It has an

independent existence apart from Article 14. It is a

rule of administrative law which has been

judicially evolved as a check against exercise of

arbitrary power by the executive authority. If we

turn to the judgment of Mr. Justice Frankfurter and

examine it, we find that he has not sought to draw

support for the rule from the equality clause of the

United States Constitution, but evolved it purely

as a rule of administrative law. Even in England,

the recent trend in administrative law is in that

direction as is evident from what is stated at pages

540-41 in Prof. Waders Administrative Law 4th

edition. There is no reason why we should hesitate

to adopt this rule as a part of our continually

expanding administrative law. Today with

tremendous expansion of welfare and social

service functions, increasing control of material

and economic resources and large scale

assumption of industrial and commercial activities

by the State, the power of the executive

Government to affect the lives of the people is

steadily growing. The attainment of socio-

38

economic justice being a conscious end of State

policy, there is a vast and inevitable increase in the

frequency with which ordinary citizens come into

relationship of direct encounter with State power-

holders. This renders it necessary to structure and

restrict the power of the executive Government so

as to prevent its arbitrary application or exercise.

Whatever be the concept of the rule of law,

whether it be the meaning given by Dicey in his

"The Law of the Constitution" or the definition

given by Hayek in his "Road to Serfdom" and

"Constitution of liberty" or the exposition set-forth

by Harry Jones in his "The Rule of Law and the

Welfare State", there is, as pointed out by Mathew,

J., in his article on "The Welfare State, Rule of

Law and Natural Justice" in "Democracy, Equality

and Freedom," "substantial agreement is in juristic

thought that the great purpose of the rule of law

notion is the protection of the individual against

arbitrary exercise of power, wherever it is found".

It is indeed unthinkable that in a democracy

governed by the rule of law the executive

Government or any of its officers should possess

arbitrary power over the interests of the individual.

Every action of the executive Government must be

informed with reason and should be free from

arbitrariness. That is the very essence of the rule of

law and its bare minimal requirement. And to the

application of this principle it makes not

difference whether the exercise of the power

involves affection of some right or denial of some

privilege.”

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

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

39

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

be illegal and without jurisdiction.

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

(without going into the individual cases).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

40

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

the loss suffered for a period of three years.

We have also noticed hereinbefore that even the amount of security

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

contract was being given for one year only.

We may for the purpose of further discussions take into consideration

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

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

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

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

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

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

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

noticed hereinbefore, was conducted on 19.7.1997.

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

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

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

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

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

41

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

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

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

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

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

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

available to the State Government for compensating itself towards the

damage suffered by it.

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

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

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

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

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

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

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

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

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

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

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

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

42

notice dated 21.10.1997 within three days without complying with the

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

opportunity of hearing entirely on the basis of the recommendations made

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

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

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

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

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

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

amount of security is to be taken into consideration indisputably there

would be no default.

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

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

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

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

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

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

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

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

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

43

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

confers a discretionary jurisdiction on the Assistant Commissioner of

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

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

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

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

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

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

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

resale or departmental management or other disposal of the privilege shall

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

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

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

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

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

of any of the aforementioned actions taken must therefore be clearly

ascertained.

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

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

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

44

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

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

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

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

The proviso appended confers a wide jurisdiction upon the Assistant

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

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

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

postulate that consequences must ensue on happening of one contingency or

the other.

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

damages cannot be calculated and the terms of the contract provides

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

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

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

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

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

Ltd. [AIR 1970 SC 1986]

Section 74 of the Contract Act reads as under:

45

“When a contract has been broken, if a sum is

named in the contract as the amount to be paid in

case of such breach, or if the contract contains any

other stipulation by way of penalty, the party

complaining of the breach is entitled, whether or

not actual damage or loss is proved to have been

caused thereby, to receive from the party who has

broken the contract reasonable compensation not

exceeding the amount so named or, as the case

may be, the penalty stipulated for.

* * * * * *”

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

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

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

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

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

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

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

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

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

observed at p.526 (of SCR):

“Section 74 of the Indian Contract Act deals with

the measure of damages in two classes of cases (i)

where the contract names a sum to be paid in case

of breach, and (ii) where the contract contains any

other stipulation by way of penalty.... The measure

of damages in the case of breach of a stipulation

by way of penalty is by Section 74 reasonable

46

compensation not exceeding the penalty stipulated

for.”

The Court also observed:

"It was urged that the section deals in terms with

the right to receive from the party who has broken

the contract reasonable compensation and not the

right to forfeit what has already been received by

the party aggrieved. There is however no warrant

for the assumption made by some of the High

Courts in India, that Section 74 applies only to

cases where the aggrieved party is seeking to

receive some amount on breach of contract and not

to cases whereupon breach of contract an amount

received under the contract is sought to be

forfeited. In our judgment the expression "the

contract contains any other stipulation by way of

penalty" comprehensively applies to every

covenant involving a penalty whether it is for

payment on breach of contract of money or

delivery of property in future, or for forfeiture of

right to money or other property already delivered.

Duty not to enforce the penalty clause but only to

award reasonable compensation is statutorily

imposed upon courts by Section 74. In all cases,

therefore, where there is a stipulation in the nature

of penalty for forfeiture of an amount deposited

pursuant to the terms of contract which expressly

provides for forfeiture, the court has jurisdiction to

award such sum only as it considers reasonable but

not exceeding the amount specified in the contract

as liable to forfeiture.", and that,

"There is no ground for holding that the

expression "contract contains any other stipulation

by way of penalty" is limited to cases of

stipulation in the nature of an agreement to pay

money or deliver property on breach and does not

47

comprehend covenants under which amounts paid

or property delivered under the contract, which by

the terms of the contract expressly or by clear

implication are liable to be forfeited.”

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

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

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

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

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

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

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

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

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

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

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

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

the undertaking is of the nature of a penalty.

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

[(2007) 1 SCC 228]}

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

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

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

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

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

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

order passed by the High Court.

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

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

It was in the aforementioned situation we thought of taking into

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

parties.

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

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

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

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

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

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

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

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

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

……………….…..………….J.

[S.B. Sinha]

..………………..……………J.

[Cyriac Joseph]

NEW DELHI;

MARCH 05, 2009

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