1993 (10) TMI 354 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Competence of the State to legislate on industrial alcohol/rectified spirit.
2. Validity of Rule 17 of the Karnataka Excise (Manufacture and Bottling of Arrack) Rules, 1987.
3. Arbitrariness and reasonableness of the price fixation for rectified spirit.

Issue-wise Detailed Analysis:

I. Competence of the State to Legislate on Industrial Alcohol/Rectified Spirit:

The petitioners contended that the regulation of ethyl alcohol falls solely within the purview of the Central Government as per the IDR Act. They argued that the Supreme Court's judgment in the Second Synthetics case established that the State's legislative competence is limited to preventing the misuse of non-potable alcohol. The petitioners further asserted that the withdrawal of Central Government control orders did not revive the State's power to regulate industrial alcohol.

The judgment discussed the concept of "occupied field" and the implications of the IDR Act and the Ethyl Alcohol (Price Control) Order. It was concluded that the State has the power to regulate the manufacture and dealing of rectified spirit to prevent its diversion or misuse. However, the State's power to fix the price of industrial alcohol under Entry 33 of List III remains unless the Central Government exercises its power under Section 18-G of the IDR Act.

II. Validity of Rule 17 of the Karnataka Excise (Manufacture and Bottling of Arrack) Rules, 1987:

Rule 17 empowers the State Government to fix the price of rectified spirit supplied for the manufacture of arrack. The petitioners argued that this rule is ultra vires the Act and suffers from excessive delegation of legislative power. The court examined whether Rule 17 could be justified under Entry 33 of List III or if it was based on the State's alleged exclusive privilege over intoxicating liquors.

The court found that the Karnataka Excise Act was enacted under the assumption that the State had exclusive privilege over rectified spirit, which was later overruled by the Supreme Court in the Second Synthetics case. The Act did not provide specific guidance for price fixation, unlike the Ethyl Order. Consequently, Rule 17, in so far as it governs rectified spirit, was declared unconstitutional and ultra vires the Act.

III. Arbitrariness and Reasonableness of the Price Fixation for Rectified Spirit:

The State Government fixed the price of rectified spirit at Rs. 8.50 per litre under Rule 17. The petitioners contended that this price was arbitrary and unreasonable, given the cost of molasses and the production cost of rectified spirit. The court noted that the price of molasses had increased significantly, resulting in a higher cost of rectified spirit.

The court found that the State's price fixation did not take into account the fluctuating prices of molasses and the actual cost of production. The price of Rs. 8.50 per litre was deemed unreasonable, unfair, and arbitrary. The court held that the price fixation violated Articles 14 and 19(1)(g) of the Constitution.

Conclusion:

The writ petitions were allowed, declaring Rule 17 of the Karnataka Excise (Manufacture and Bottling of Arrack) Rules, 1987, as unconstitutional in so far as it governs rectified spirit. The price fixed by the State Government for rectified spirit at Rs. 8.50 per litre was also declared void for being arbitrary, unreasonable, and unfair.