Full Judgment Text
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PETITIONER:
THE BULLION AND GRAIN EXCHANGE LTD. AND OTHERS
Vs.
RESPONDENT:
THE STATE OF PUNJAB
DATE OF JUDGMENT:
13/09/1960
BENCH:
GUPTA, K.C. DAS
BENCH:
GUPTA, K.C. DAS
DAS, S.K.
HIDAYATULLAH, M.
SHAH, J.C.
AYYANGAR, N. RAJAGOPALA
CITATION:
1961 AIR 268 1961 SCR (1) 668
ACT:
Forward Contracts Tax-Validity of enactment-Legislative
competence-Severability of valid portion-Punjab Forward Con-
tracts Tax Act, 1951 (Punj). 7 of 1951), s. 2-Constitution
of India, Seventh Schedule, List II, Entry 62.
HEADNOTE:
The appellants, who were carrying on the business of com-
mission agents in forward contracts, filed a petition before
the High Court of Punjab under Art. 226 of the Constitution
of India challenging the validity of the Punjab Forward
Contracts Tax Act, 1951, on the ground that it was ultra
vires the powers conferred upon the State Legislature. The
Act provided for the levy of a tax on forward contracts
which were defined, by. S. 2, as agreements, oral or
written, for sale of goods on a future date but on the basis
of which actual delivery of goods was not made or taken but
only the difference between the price of the goods agreed
upon and that prevailing on the date mentioned in the
agreement or any other date was paid or received by the
parties. The High Court took the view that the Act was one
to tax speculation in futures and fell within Entry 62 of
the State List as an Act to impose taxes on betting and
gambling.
Held, that as the definition of the expression " forward
contract " in the Punjab Forward Contracts Tax Act, 1951,
does not set out all the elements which are necessary to
render a contract a wagering contract the legislature could
not be considered to have contemplated wagering contracts in
defining " forward contracts " in the way it did. The Act
therefore does not fall within Entry 62, List II, Seventh
Schedule of the Constitution, and is beyond the legislative
competence of the State Legislature.
Held, further, that even if the definition could be
considered to be wide, enough to include certain contracts
which may be wagering contracts because of the fact that the
parties to the contract had no intention to deliver the
goods, the portion of the Act which would then be valid is
so thin and truncated that the entire Act should be held
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invalid.
R. M. D. Chamarbaugwala v. The Union of India, [1957] S. C.
R. 93o, relied on.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 123/55
669
Appeal by special leave from the judgment and order dated
November 12, 1951, of the Punjab High Court in Writ Petition
No. 116 of 1951.
N. C. Chatterjee, S. N. Andley, J. B. Dadachanji and
Rameshwar Nath, for the appellants.
S. M. Sikri, Advocate-General for the State of Punjab,
N. S. Bindra and D. Gupta, for the respondent.
1960. September 13. The Judgment of the Court was
delivered by
DAs GUPTA J.-This appeal is against the judgment of the High
Court of Punjab rejecting the appellant’s application under
Art. 226 of the Constitution. In this application the
appellants who had been carrying on the business of
commission agents in Forward Contracts at Ludhiana alleged
that the Punjab Forward Contracts Tax Act, 1951 (Punjab Act
No. VII of 1951), was ultra vires the powers conferred upon
the State Legislature and prayed for a declaration that the
Act and the notification made and the rules promulgated
thereunder by the respondent, State of Punjab, were void.
There was a further prayer for directing the State of Punjab
by a writ of mandamus or other appropriate writ to allow the
petitioners to carry on the business of Forward Contracts or
as commission agents in Forward Contracts unrestricted by
the provisions of the above-mentioned Act and the rules
thereunder And not to enforce the Act.
The respondent’s case as made in para. 5 of its written-
statement was that " the impugned Act is not ultra vires the
State Legislature. It is a law with respect to the matters
enumerated in& Entry 62 of the State List read with Entry
No. 7 of the Concurrent List of the 7th Schedule."
The High Court held that:-
"The impugned Act, is an Act to tax speculation in futures,
at least so far as dealers such as the present applicants
are concerned, falls within Item 62 of the State List as an
Act to impose taxes on betting and gambling, and to that
extent at least is valid."
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In this view the High Court rejected the application.
The only question for our decision is as regards the
legislative competence of the State Legislature of Punjab to
enact this statute. Though a reference under Entry 7 of the
Concurrent List of the 7th Schedule of the Constitution was
made in the respondent’s written statement no reliance
appears to have been placed on this entry in the High Court
nor has it been relied on before us by the learned counsel
appearing on behalf of the respondent and it is quite clear
that the impugned Act cannot fall within Item 7 of the
Concurrent List which is in these terms:" Contracts,
including partnership, agency, contracts of carriage, and
other special forms of contracts, but not including
contracts relating to agricultural land ". It is common
ground before us that the Act must be held to be within the
legislative competence of the Punjab State Legislature only
if in pith and substance it fell within Item 62 of the State
List and if it did not so fall it must be held to be beyond
the State Legislature’s competence. Item 62 mentions "
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taxes on luxuries, including taxes on entertainment, amuse-
ments, betting and gambling."
If the impugned Act provides for a tax on betting and
gambling then and then only it can come within Item 62. The
Act provides for the levy of a tax on forward contracts and
it has defined " forward contract" in s. 2 in these words:
"Forward contract" means an agreement, oral or written, for
sale of goods on a future date but on the basis of which
actual delivery of goods is not made or taken but only the
difference between the price of the goods agreed upon and
that prevailing on the date mentioned in the agreement or
any other date is paid or received by the parties ". "
Dealer " is defined in the same section to mean " any
person, firm, Hindu Joint family or limited concern,
including an arhti or " chamber " or association formed for
the purpose of conducting business in forward contracts, who
conducts such business in the course of trade in the State
either on his own behalf or on behalf of any other person,
arhti, "chamber" or association". ,Sale" is defined to mean
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"the final, settlement in respect of an agreement to sell
goods mentioned in a forward contract, and it shall be
deemed to have been completed on the date originally fixed
in the forward contract for this purpose or any other date
on which the final settlement is made ". Section 4 is the
charging section and provides for a levy on the business in
forward contracts of a dealer a tax at such rates as the
Government may by notification direct. Section 5 lays down
that every dealer shall be liable to pay tax under this Act
as long as he continues his business in forward contracts.
Section 6 prohibits any dealer from carrying on business in
forward contracts unless he has been registered and
possesses a registration certificate. Section 7 deals with
the mode of payment of the tax and for submission of returns
while s. 8 provides for assessment of the tax.
As the term " forward contract " has been defined in the
statute itself we have to forget for the purpose of deciding
the present question any other notion about what a "forward
contract" means. For the purpose of this statute every
agreement for sale of goods on a future date is not a "
forward contract ". It has to be an agreement for the sale
of goods on a future date and has to satisfy two other
conditions, viz., (1) actual delivery of the goods is not
made on the basis of the agreement and (2) the difference
between the price of the goods agreed upon and that
prevailing on the date mentioned in the agreement or any
other date is paid by the buyer or received by the seller.
The test of a forward contract under this definition is that
delivery of goods is not made or taken but only the
difference between the price of the goods as agreed upon and
that prevailing on some other date is paid.. Is such a
contract necessarily a wagering contract and therefore
gambling ?
When two parties enter into a formal contract for the sale
and purchase of goods at a given price, and for their
delivery at a given time it may be that they never intended
an actual transfer of goods at all, but they intended only
to pay or receive the difference according as the market
price should vary from the
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contract price. When such is the intention it has been held
that is not a commercial transaction but a wager on the rise
or fall of the market, which comes within the connotation of
" gambling ". It is the fact that though in form an
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agreement for sale purports to contemplate delivery of the
goods and the payment of the price, neither delivery nor
payment of the price is contemplated by the parties and what
is contemplated is merely the receipt and payment of the
difference between the contract price and the price on a
later day that makes the contract a wagering contract. In
the definition of " forward contract in the impugned Act
there is no reference, directly or indirectly’ to such an
intention. It is only by reading for the words " actual
delivery of goods is not made or taken " the words actual
delivery of goods is not to be made or taken and by
substituting for the words " is paid or received by the
parties " the words " is to be paid or received by the
parties " and also by omitting the words " on the basis of
which " that the word " forward contract " as defined in the
section can be held to refer to a wagering contract. This
however we are not entitled to do. The reason why the
Legislature did not use the words " to be made or taken " or
" to be paid or received " in the definition clause is not
far to seek. An agreement oral or written which in terms
provides that actual delivery is not to be made or taken and
that the entire price of the goods is not to be paid and
only the difference between the price of the goods agreed
upon and that prevailing on some other date would be paid
would be hit by s. 30 of the Contract Act and would not be
enforceable. Parties to a written agreement for sale of
goods would therefore take good care to see that the terms
do not provide that delivery should not be made but only the
difference is to be paid. There might be an oral
understanding between the parties that no delivery should be
demanded or made, but that only difference should be paid.
But it will be next to impossible for a tax being imposed on
the proof of such intention, not expressed in the written
contract. When the agreement for sale of goods is oral, but
the parties
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agree as between themselves that no delivery would be made,
but difference in price would be paid, it would be equally
impossible for a taxing authority to discover in which of
the contracts such an agreement has been made. The dispute
whether a particular contract is a wagering contract or not
arises in civil courts generally when the contract of sale
is sought to be enforced and one of the parties tries to
avoid the contract by recourse to s. 30 of the Contract Act.
When such a dispute comes before the Court, it becomes
necessary to consider all the circumstances to see whether
they warrant the legal inference that the parties never
intended any actual delivery but intended only to pay or
receive the difference according as the market price should
vary from the contract price. It is therefore well nigh
impossible for any taxing authority to brand a particular
forward con. tract as a wagering contract ; nor is it to be
expected that any party on whom the tax is sought to be
levied, will voluntarily disclose that in the particular
contract or in a number of contracts, the intention was not
to deliver the goods but only to pay or receive the
difference in price. Aware of these difficulties in the
practical application of a law to levy tax on wagering
contracts, the legislature decided to levy tax on contracts
for sale of goods in which actual delivery is not factually
made or taken, whatever be the intention at the time when
the agreement was made.
It appears clear therefore that the words " forward contract
" as defined in the Act do not set out all the elements
which are necessary to render a contract a wagering contract
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and so the impugned legislation to tax forward contracts as
defined does not come within. Entry 62.
The learned Advocate-General for the State of Pun. jab tried
to convince us that even though the words used in defining
forward contract may include contracts which do not amount
to wagering contracts, they are wide enough to include
certain contracts which may be wagering contracts because of
the fact that the parties to the contract, had no intention
to
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deliver the goods. If the definition is wide enough- to
include contracts which are wagering contracts, he contends,
the statute should not he struck down as a whole but should
be held to be valid in respect only of such wagering
contracts. On behalf of the appellants Mr. N. C. Chatterjee
has drawn our attention to the provisions of registration of
" dealers " in s. 6 and has argued that the very fact that
the Legislature was calling upon persons dealing in "
forward contracts " to register themselves and to prohibit
dealing in forward contracts by non-registered dealers,
justifies the conclusion that the Legislature was not
thinking of wagering contracts at all. As against this it
is proper to note that the Constitution itself contemplated
taxation on gambling " by State Legislatures. It is however
one thing to tax gambling, and quite another thing for a
Legislature to encourage gambling by asking persons to
register themselves for-this purpose. The definition of a "
dealer " it has to be noticed includes " a limited concern,
including, a Arhti, Chamber or association formed for the
purpose of conducting business in forward contracts ".
While it might happen in fact that an association would be
formed for the purpose of conducting business in wagering
contract, it is hardly likely that the Legislature would
take upon itself the task of openly permitting and
recognizing such associations. These, in our opinion, are
good reasons for thinking that the Legislature did not
contemplate wagering contracts at all in defining " forward
contract" in the way it did.
Assuming however that the definition is wide enough to
include wagering contracts, the question arises whether the
portion of the Act which would then be valid is severable
from the portion which would remain invalid. One of the
rules approved by this Court in R. M. D. Chamarbaugwala v.
The Union of India (1), for deciding this question was laid
down in these words:-
"In determining whether the valid parts of a statute are
separable from the invalid parts thereof, it
(1) [1957] S.C.R. 930.
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is the intention of the legislature that.is the determining
factor. The test to be applied is whether the legislature
would have enacted the valid part if it had known that the
rest of the statute is invalid."
A second rule was that if
"the valid and invalid parts of a statute are independent
and do not form part of a scheme but what is left after
omitting the invalid portion is so thin and truncated as to
be in substance different from what it was when it emerged
out of the legislature, then also it will be rejected in its
entirety. "
Applying either of these rules, we are bound to hold that
the entire Act should in the present case be held invalid.
It seems to us clear that if the Legislature had been
conscious that taxation on all forward contracts was not
within its legislative competence it would have at once seen
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that because of the difficulty of finding out which among
the contracts for sale of goods on a future date are
wagering contracts, it would not be worthwhile to enact any
law for taxing wagering contracts only. It is equally clear
that once the law is held to be invalid as regards forward
contracts other than wagering contracts, what is left is "
so thin and truncated as to be in substance different from
what it was when it emerged out of the legislature ". The
respondent’s contention that the statute should be hold to
be valid in respect of wagering contracts even though
invalid as regards other forward contracts must therefore
also be rejected.
Our conclusion therefore is that the impugned statute does
not fall within Item 62 of the State List and that it is
beyond the legislative competence of the State Legislature.
The appellants were therefore entitled to appropriate
reliefs as prayed for in their petition under Art. 226 of
the Constitution.
We therefore allow this appeal, set aside the order of the
High Court and direct that the petition under Art. 226 of
the Constitution be allowed and declare that the Punjab
Forward Contracts Tax Act No. VII of 1951 is void and
unconstitutional as it is ultra vires the powers of the
State Legislature, that the notification made under the
rules promulgated by the
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respondent under this Act are also void and unconstitutional
and that a mandamus do issue directing the respondent to
allow the petitioners to carry on the business of forward
contracts or as commission agents for forward contracts
unrestricted by the provisions of the said Punjab Forward
Contracts Tax Act No. VII of 1951 and the rules thereunder
and not to enforce the provisions of this Act and the rules.
The appellants will get their costs in this Court as also in
the court below.
Appeal allowed.