Supreme Court clarifies adjustment of departmental management fees in liquor license cancellation cases: Assistant Excise Commissioner vs. Esthappan Cherian (2021) INSC 528 (06 September 2021)

Date of the Judgment: 06 September 2021
Citation: (2021) INSC 528
Judges: L. Nageswara Rao, J., S. Ravindra Bhat, J.
Can a state government forfeit the departmental management fees collected after cancelling a liquor license, while also recovering dues from the original licensee? The Supreme Court recently addressed this question, clarifying the rules regarding the adjustment of departmental management fees when a liquor license is cancelled and the state takes over management of the shops. The bench, comprising Justices L. Nageswara Rao and S. Ravindra Bhat, delivered the judgment, with Justice S. Ravindra Bhat authoring the opinion.

Case Background

The case revolves around a liquor license granted to Esthappan Cherian (the licensee) for the year 1993-94 in Kerala. The licensee won a bid for ₹60 lakhs and was permitted to import 13,00,920 litres of rectified spirit. The licensee entered into an agreement with the State on 01-04-1993. Due to alleged defaults in payment and failure to replenish the security deposit, the state issued a show cause notice on 23-07-1993. The license was subsequently cancelled on 19-08-1993. The state then attempted to re-auction the shops but was unsuccessful. Consequently, the Excise Department managed the shops from 13-09-1993 to 31-03-1994, collecting ₹14,94,570 as departmental management fees and ₹16,50,971 as duty on rectified spirit. The state claimed that had the licensee continued, it would have earned ₹1,09,87,989 and demanded the dues from the licensee.

Timeline:

Course of Proceedings

The licensee filed a writ petition challenging the cancellation and seeking to limit its liability to the period before cancellation. A single judge dismissed the petition. The licensee appealed to the Division Bench of the Kerala High Court. The Division Bench, relying on a previous decision, ruled that since the contract was entered before the amendment of Rule 13 of the Abkari Shops Departmental Management Rules, 1972, the licensee was liable only for the actual loss suffered by the government, including the departmental management fees and excise duty collected by the state. The state then appealed to the Supreme Court.

Legal Framework

The core of the dispute lies in the interpretation of Rule 13 of the Abkari Shops Departmental Management Rules, 1972, and its amendment. The original Rule 13 stated:

“13. Departmental Management fee to be given credit of – The amount collected as Departmental Management fee may be given credit towards the dues from the original contractor provided he had completed the security and such credit shall be given only up to the date of confirmation of the resale, if any. In the case of resale purchasers, the Departmental Management fee collected from the date of confirmation of the resale may be given credit towards the dues from the resale purchaser, if he completes the security. The departmental management fee that may be given credit to the Original, contractor shall be forfeited if he had not completed the security. Similarly, the departmental management fee that may be given credit to the resale purchaser shall be forfeited if he fails to complete the security.”

The amended Rule 13, effective from 23-12-1993, stated:

“13. Departmental Management fee to be given credit of – The Departmental Management fee collected from a shop while it was under Departmental Management due to default of payment of security, kist, excise duty etc., shall be liable to forfeiture: Provided that where the licensee dies during the currency of a licence, the amount collected as departmental management fee may be credited towards his kist amount.”

The Abkari (Disposal in Auction) Rules also play a role, particularly Rule 10 of Chapter IV, which deals with security deposits, and Rule 5(19), which specifies the appropriation of security towards kist dues. Rule 6 (28) provides a grace period for remitting kist instalments. The interplay of these rules determines the liabilities of the licensee and the state’s powers in case of default.

Arguments

State’s Arguments:

• The state argued that the High Court erred in relying on a previous judgment that held the amended Rule 13 inapplicable to contracts entered before 23-12-1993.
• The state contended that the amended Rule 13 should apply, which does not allow for the adjustment of departmental management fees against the dues of the original licensee.
• The state submitted that the licensee did not replenish the security deposit, and therefore, under the old rule, no credit could be given for the departmental management fees collected.
• The state argued that its policy was not to give credit for departmental management fees, and this policy was based on a correct understanding of the statute.

Licensee’s Arguments:

• The licensee argued that the contract was entered into on 01-04-1993, before the amendment to Rule 13, and therefore, the amended rule should not apply.
• The licensee contended that the cancellation of the license occurred on 19-08-1993, before the amendment on 23-12-1993, making the amendment inapplicable to a past event.
• The licensee argued that it cannot be held liable for the entire period since the department itself ran the outlets and collected departmental management fees and excise duties.
• The licensee relied on the High Court’s previous ruling in Lucka v State of Kerala & Ors, which held that the amended Rule 13 was inapplicable to contracts entered into before the amendment.
• The licensee pointed out that the state rejected its application for relief under the 2008 amnesty scheme despite the High Court’s judgment.
• The licensee stated that it had deposited 50% of the admitted amount under the 2011 amnesty scheme as per the Supreme Court’s interim orders.

Innovativeness of the argument: The licensee’s argument that the amended rule should not apply to past events, specifically the cancellation of the license, was a key innovative point. It highlighted the importance of the timing of the amendment relative to the events in question.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue before the court was:

1. Whether the amended Rule 13 of the Abkari Shops Departmental Management Rules, 1972, which disallows the adjustment of departmental management fees, applies to contracts entered into before the amendment came into effect on 23-12-1993.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The High Court’s decision in Lucka v State of Kerala & Ors was followed, affirming that the amended Rule 13 does not apply to pre-existing contracts.
• The Supreme Court’s decision in Commissioner of Income Tax v Vatika Township was relied upon to reiterate that laws are generally prospective unless expressly stated otherwise.
• The Supreme Court’s decision in Union of India v M.C. Ponnose was relied upon to reiterate that delegated legislation cannot operate retrospectively without express statutory authorization.
• The Supreme Court’s decision in Hukum Chand v Union of India was relied upon to reiterate the principle against retrospective application of delegated legislation.
• The Supreme Court’s decision in Regional Transport Officer v Associated Transport Madras was relied upon to reiterate the principle against retrospective application of delegated legislation.
• The Supreme Court’s decision in Federation of Indian Mineral Industries v Union of India was relied upon to reiterate the principle against retrospective application of delegated legislation.
• The Supreme Court’s decision in Union of India v G.S. Chatha Rice Mills was relied upon to reiterate the principle against retrospective application of delegated legislation.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle against retrospective application of laws and delegated legislation. The court emphasized that the amended Rule 13 could not apply to contracts entered into before its enactment. The court also considered the fact that the state had collected departmental management fees and excise duties during its management of the shops, which should have been adjusted against the licensee’s dues. The denial of benefits under the amnesty scheme was also a factor in the court’s decision.

Fact:Law Ratio: The court’s decision was more influenced by legal principles (70%) than by the specific factual aspects of the case (30%). The court’s emphasis on the principle against retrospective application of laws and the interpretation of the relevant rules indicates a greater reliance on legal reasoning.

The court rejected the state’s argument that the amended Rule 13 should apply and that no adjustment of departmental management fees should be allowed. The court reasoned that the amended rule could not be applied retrospectively to contracts entered into before the amendment. The court also emphasized the principle of fairness, stating that the state should not benefit from both the departmental management fees and the recovery of dues from the original licensee. The court relied on previous rulings, such as Lucka v State of Kerala & Ors, to support its decision.

“The obvious basis of the principle against retrospectivity is the principle of ‘fairness’”

“The courts will not, therefore, ascribe retrospectivity to new laws affecting rights unless by express words or necessary implication it appears that such was the intention of the legislature.”

“In these circumstances, the amounts calculated by the state as departmental management fees for the period September 1993 to March 1994, when it actually was in charge of the vend, and carried out transactions, had to be adjusted.”

There was no minority opinion in this case. The bench was unanimous in its decision.

The Court’s decision implies that the state cannot recover amounts already collected as departmental management fees when managing a liquor vend after canceling the original license if the contract was entered into before the amendment of Rule 13. This decision also reinforces the principle against retrospective application of laws and delegated legislation, ensuring fairness in contractual relationships. The judgment also clarifies that the state cannot deny benefits under amnesty schemes to those who have succeeded in court, highlighting the importance of honoring judicial decisions.

Key Takeaways

• Amended rules or laws cannot be applied retrospectively unless explicitly stated.
• Departmental management fees collected by the state after canceling a liquor license must be adjusted against the dues of the original licensee if the contract was entered into before the amendment of Rule 13.
• The state must honor judicial decisions and provide benefits under amnesty schemes to those who are entitled.
• The principle of fairness is a key consideration in legal decision-making.

Directions

The Supreme Court issued the following directions:

1. Upon payment of 50% of ₹40,51,288 within two months, the respondent’s liabilities towards the arrears of dues for the liquor vend shall stand discharged.
2. The state is directed to release the respondent’s property attached and sought to be sold, upon receiving the balance 50% of the amount within two months or latest within four weeks of receipt of the amount.
3. The respondent shall not be liable to pay any interest on the principal amount. The State shall refrain from initiating any proceedings for its recovery.

Development of Law

The ratio decidendi of the case is that the amended Rule 13 of the Abkari Shops Departmental Management Rules, 1972, which disallows the adjustment of departmental management fees, cannot be applied retrospectively to contracts entered into before the amendment came into effect. This case reinforces the principle against retrospective application of laws and delegated legislation. The court also clarified that the state must adjust the departmental management fees collected during its management of the liquor vends against the dues of the original licensee, if the contract was entered into before the amendment of Rule 13. This decision also highlights the importance of fairness and the need to honor judicial decisions and amnesty schemes.

Conclusion

The Supreme Court upheld the High Court’s decision, ruling that the amended Rule 13 of the Abkari Shops Departmental Management Rules, 1972, could not be applied retrospectively to contracts entered into before the amendment. The court directed the state to adjust the departmental management fees collected against the licensee’s dues and to release the attached property upon payment of the remaining amount. This judgment reinforces the principle against retrospective application of laws and ensures fairness in contractual relationships.