Supreme Court Overrules Synthetics (7J), Affirms State Power Over All Intoxicating Liquors: State of U.P. vs. Lalta Prasad (23 October 2024)

Case Background

The case arose from a dispute regarding the levy of vend fees on denatured spirit by the Government of Uttar Pradesh. The appellants, who held licenses for the wholesale sale of denatured spirit, challenged the imposition of these fees. The matter eventually reached the Supreme Court, leading to a reference to a larger bench to reconsider the scope of state powers over intoxicating liquors, particularly in light of the Industries (Development and Regulation) Act, 1951 (IDRA). The core issue was whether the term “intoxicating liquors” in Entry 8 of List II of the Seventh Schedule to the Constitution includes all forms of alcohol or only potable alcohol.

Timeline

Course of Proceedings

The matter initially went before the Allahabad High Court, which ruled that the term “intoxicating liquors” includes denatured spirit. This decision was challenged before the Supreme Court. A two-judge bench referred the matter to a larger bench, which eventually led to the seven-judge bench decision in Synthetics [7J]. Subsequently, a three-judge bench, noting inconsistencies in the interpretation of Synthetics [7J] in later cases, referred the matter to a nine-judge bench, leading to the present judgment.

Legal Framework

The judgment interprets several key constitutional provisions and statutes, including:

• Entry 8 of List II of the Seventh Schedule to the Constitution, which deals with “intoxicating liquors.” “Intoxicating liquors, that is to say, the production, manufacture, possession, transport, purchase and sale of intoxicating liquors”
• Entry 52 of List I, which grants Parliament the power to legislate on industries the control of which by the Union is declared by Parliament by law to be expedient in the public interest. “Industries, the control of which by the Union is declared by Parliament by law to be expedient in the public interest.”
• Entry 33 of List III, which allows both Parliament and State Legislatures to legislate on trade, commerce, production, supply and distribution of products of industries controlled by the Union. “Trade and commerce in, and the production, supply and distribution of – (a) The products of any industry where the control of such industry by the Union is declared by Parliament by law to be expedient in the public interest, and imported goods of the same kind as such products; (b) Foodstuffs, including edible oilseeds and oils; (c) Cattle fodder, including oilcakes and other concentrates; (d) Raw cotton, whether grinned or ungrinned, and cotton seed; and (e) Raw jute.”
• The Industries (Development and Regulation) Act, 1951 (IDRA), particularly Section 2 and Item 26 of the First Schedule, which deals with fermentation industries.

Arguments

Appellants’ Arguments:

• The term “intoxicating liquors” in Entry 8 of List II should be interpreted broadly to include all liquids containing alcohol, including industrial alcohol.
• The State has exclusive jurisdiction over this field and cannot be ousted by a Parliamentary enactment.
• The 1935 Act used different phrases in Entries 31 and 40 of List II of its Seventh Schedule, which are relatable to Entries 8 and 51 of List II of the Seventh Schedule to the Constitution respectively.
• The State has the power to regulate the manufacture of ENA, which falls under the pre-production category.
• The State also has the power to regulate the distribution of denatured alcohol.

Respondents’ Arguments:

• The production, manufacture, trade, and commerce of alcohol constitute a chain of economic activity and cannot be separated.
• Entry 52 of List I is a special entry uncontrolled by any other entry including Entry 8 of List II.
• The term “intoxicating liquors” in Entry 8 of List II does not include all classes of alcoholic liquids.
• The focus of the framers while drafting the provisions concerning alcohol in the Constitution was temperance, regulation of trade and commerce in consumable alcohol preparations and to raise revenue.
• The observations in SIEL (supra) and Tika Ramji (supra) are incorrect in completely separating Entry 52 of List I from Entry 33 of List III.
• The State does not have the legislative competence to levy excise duty on the material or input that is used in the process of producing alcoholic liquor for human consumption.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether Entry 52 of List I of the Seventh Schedule to the Constitution overrides Entry 8 of List II.
2. Whether the expression ‘intoxicating liquors’ in Entry 8 of List II of the Seventh Schedule to the Constitution includes alcohol other than potable alcohol.
3. Whether a notified order under Section 18G of the IDRA is necessary for Parliament to occupy the field under Entry 33 of List III of the Seventh Schedule to the Constitution.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Judgment

How each authority was viewed by the Court?

• State of Bombay v. F.N. Balsara, 1951 SCC 860: The court clarified that this case did not limit the meaning of “intoxicating liquor” to its common parlance meaning, and that it included alcoholic liquids which are not normally consumed as drinks.
• Indian Mica and Micancite Industries v. State of Bihar, (1971) 2 SCC 236: The court noted that this case correctly held that denatured spirit is “intoxicating liquor” and that the State can levy fees for services rendered.
• Synthetics and Chemicals Ltd. v. State of U.P., (1990) 1 SCC 109: The court overruled this judgment, holding that it incorrectly restricted the definition of “intoxicating liquor” and the state’s power to regulate it.
• Shri Bileshwar Khand Udyog Khedut Sahakari Mandali v. State of Gujarat, (1992) 2 SCC 42: The court noted that this case correctly stated that the State has the power to regulate non-potable alcohol to prevent its misuse.
• Gujchem Distillers India v. State of Gujarat, (1992) 2 SCC 399: The court noted this case followed Shri Bileshwar Khand Udyog.
• State of A.P. v. McDowell & Co., (1996) 3 SCC 709: The court noted that this case correctly held that the State has the power to prohibit potable liquor.
• Vam Organic Chemicals v. State of U.P., (1997) 2 SCC 715: The court noted that this case correctly held that the State may lay down regulations to ensure that non-potable alcohol is not misused.
• Bihar Distillery v. Union of India, (1997) 2 SCC 727: The court clarified the demarcation of power between the State and Union with respect to rectified spirit based on its use.
• State of U.P. v. Modi Distillery, (1995) 5 SCC 753: The court noted that this case correctly held that the State does not have the legislative competence to levy excise duty on the material or input that is used in the process of producing alcoholic liquor for human consumption.
• State of U.P. v. Vam Organic Chemicals Ltd., (2004) 1 SCC 225: The court noted that this case correctly held that the State has the power to levy fees to ensure that industrial alcohol is not misused.
• Tika Ramji v. State of U.P., AIR 1956 SC 676: The court held that the observations in Tika Ramji regarding the absence of a notified order by the Union government is not correct.
• State of Madras v. Gannon Dunkerley & Co., 1959 SCR 379: The court relied on this case to understand the meaning of “intoxicating liquors” using the legal meaning.
• SIEL Ltd v. Union of India, (1998) 7 SCC 26: The court relied on this case to argue that the subjects enumerated in Entry 33, List III are excluded from Entry 52, List I.

What weighed in the mind of the Court?

The Court’s reasoning was primarily influenced by the need to maintain the federal balance, the wide interpretation of legislative entries and to ensure that no entry is rendered redundant. The court emphasized that the phrase ‘intoxicating liquor’ must be given a wide meaning to include all forms of alcohol that could be misused to harm public health. The court also stressed that the State has the power to regulate the production and sale of all forms of alcohol, including those used in industries. The court also held that the power of Parliament in Entry 52 of List I is defined by the phrase ‘control’ and that the law enacted by Parliament must specify the extent of control that is necessary to be taken in public interest. The State Legislature will have the competence to legislate with respect to the field which is not the subject matter of control.

The Court held that the term “intoxicating liquors” includes all forms of alcohol that could be misused to harm public health, not just potable alcohol. The Court also held that the State has the power to regulate the production and sale of all forms of alcohol, including those used in industries. The Court overruled the decision in Synthetics (7J), which had limited the State’s power to regulate industrial alcohol.

“On an analysis of the aforesaid decisions and practice, we are clearly of the opinion that in respect of industrial alcohol the States are not authorised to impose the impost they have purported to do.”

“It has to be borne in mind that by common standards ethyl alcohol (which has 95 per cent) is an industrial alcohol and is not fit for human consumption.”

“The line of demarcation can and should be drawn at the stage of clearance/removal of the rectified spirit.”

Key Takeaways

• States have broad powers to regulate all forms of alcohol, including industrial alcohol, to prevent misuse.
• The term “intoxicating liquors” is not limited to potable alcohol but includes any alcohol that could be misused to harm public health.
• The decision in Synthetics (7J) is overruled, clarifying the scope of state legislative powers.
• The judgment reaffirms the importance of maintaining a balance between state and union powers in a federal structure.
• The ruling may lead to changes in state excise laws and regulations.

Directions

The Registry is directed to obtain administrative instructions from the Chief Justice for placing the matters before an appropriate Bench.

Development of Law

The ratio decidendi of the case is that the term “intoxicating liquors” in Entry 8 of List II includes all forms of alcohol that could be misused to harm public health and that the State has the power to regulate the production and sale of all forms of alcohol, including those used in industries. This decision overrules the previous position of law in Synthetics (7J), which had limited the State’s power to regulate industrial alcohol.

Conclusion

The Supreme Court’s judgment in State of U.P. vs. Lalta Prasad Vaish and sons clarifies the legislative powers of states over intoxicating liquors, affirming their authority to regulate all forms of alcohol. This ruling overrules the previous decision in Synthetics (7J) and provides a more comprehensive understanding of the term “intoxicating liquors” and the scope of state authority in this area. The court emphasized the need to maintain a balance between state and union powers, while also ensuring that the state has the necessary authority to regulate alcohol in the interest of public health.