TMI Blog2023 (12) TMI 753X X X X Extracts X X X X X X X X Extracts X X X X ..... no transfer or movement of the shares in the company. Induction of a new director into the Board would also not fall within the meaning of the expression transferee . In other words, a change in management of a Company should be of a nature so as to determine the ordinary Excise License in terms of Rule 4(2) and result in a proposed transferee in terms of Rule 4(3). The usual fitness and eligibility criteria for holding an excise license would come with consideration only after there is a structural change in the company. The classification made under Clause (d) and (e) of the proviso to Rule 5(1) is not founded on intelligible differentia and does not have a rational nexus to the object of the 2009 Rules. Whether clause (d) to the proviso to Rule 5 of the 2009 Rules is discriminatory and offends the right of the petitioner no. 1 to equal treatment under Article 14 of the Constitution of India? - HELD THAT:- There is also no rationale disclosed for making two separate groups from the (hitherto) general head of company in clauses (d) and (e) of the proviso to Rule 5(1). The offending proviso has carved out different provisions for levy of fees and exemption from paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons similarly-situated is too well-settled to merit a detailed discussion. The 2009 Rules clearly indicates that private limited companies and public limited companies are similarly-situated and have been treated as such in Rule 4(2). Therefore, clauses (d) and (e) of the proviso to Rule 5(1) violates the constitutional guarantee of equality by creating two separate groups/classifications for the purpose of exemption from payment of license fees. STATE OF ANDHRA PRADESH ORS. VERSUS NALLAMILLI RAMI REDDI ORS. [ 2001 (8) TMI 1396 - SUPREME COURT ] spoke of permissible classification where the law will not be viewed as discriminatory if there is uniformity in each group. The Supreme Court made room for fortuitous circumstances arising out of peculiar situations where some persons included in a class may get an advantage over the others and a classification would thus be justified unless it is arbitrary. In the present case, of private limited and public limited companies within the context of change in management and the consequent exemption from payment of license fees is undoubtedly an instance where the differentia is neither real nor substantial and the rational nexus t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent name i.e. New Kenilworth Hotel Private Limited in 2009 as the earlier excise license was under the name of New Kenilworth Hotel Limited . The petitioner responded by its letter dated 3.11.2009 explaining the factual position which has been stated above. The petitioner no. 1 received a Memo dated 9.9.2013 from the respondent no. 4/Collector of Excise, Kolkata (Central) demanding Rs. 22,50,000/- as fees towards change in management and in status of the Excise License from New Kenilworth Hotel Limited to New Kenilworth Hotel Private Limited and for the induction of new directors. The petitioners responded to the Memo by a letter dated 14.9.2013 stating that the change in status of the company was by operation of law and the induction of two new directors in the petitioner no. 1 was to fill the vacancy created by the death of two of its erstwhile directors. The petitioner stated that the petitioner no. 1 was exempted under the provision of Rule 5(1) of the West Bengal Excise (Change in Management) Rules, 2009. The respondent authorities did not consider any of the representations made by the petitioners. 5. The petitioners received another Memo dated 27.3.2017 from the respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icense fees. Counsel submits that changes in the Board of Directors in the petitioner no. 1 cannot require the petitioner having to apply for a new excise license in terms of Rule 4(2) of the 2009 Rules since a change in management has been equated with the transfer of ownership of the company. 10. The petitioners argue that clauses (d) and (e) of the proviso to Rule 5(1) of the 2009 Rules violates Article 14 of the Constitution of India since a separate mechanism has been provided for a private limited company for exemption from payment of license fees under Rule 5(1). Counsel submits that classification of a private limited company and a public limited company under clauses (d) and (e) respectively, is not based on intelligible differentia and also does not have any rational nexus to the object sought to be achieved by the 2009 Rules. Counsel submits that clause (d) to the proviso to Rule 5(1) should accordingly be declared ultra vires the Constitution of India or be suitably read up to include change in management in the usual course of business in a case of a private limited company in the same manner as clause (e) to the proviso to Rule 5(1) of the Rules. The responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in two sections in accordance with the issues state above. The conclusions of the Court are stated in the captions to the sections; the reasons for the conclusion are in the discussion which follows the captions. Changes in the Board of Directors in the usual course of business does not amount to change in management 16. This issue arises from the impugned order dated 16.2.2018 whereby the Excise Commissioner found that changes in the petitioner Company s Board of Directors in the usual course of business would attract levy of new license fees and would not be covered within the exception carved out under the proviso to Rule 5(1) of the 2009 Rules. In other words, the Excise Commissioner was of the view that the petitioner no. 1, being a Private Limited Company, would be held captive to clause (d) to the proviso of Rule 5(1) which exempts payment of the initial grant fee only upon death of a director of a private limited company. 17. The issue whether changes in the Board of Directors of a company would entitle levy of 1.5 times of the initial grant fee under Rule 5(1) was considered by this Court in IFB Agro Industries Limited vs. State of West Bengal; WPA 2170 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights and voting rights. Therefore, appointments to the Board of Directors can, by no means, be equated with a change in management. 20. Although not relevant for the present proceeding, the Finance Department of the Government of West Bengal appears to have become wiser to the implications of change in management which would be reflected in the Notification dated 11.2.2020 where Rule 3(i)(c) defines change in management in the case of a Private Limited Company to mean ...when there is any change of Directors or any change of shareholding amongst shareholders beyond 10% of the existing shareholding pattern 21. In conclusion, appointment of new directors either by reason of death of an existing director or in the usual course of business, without any impact to the shareholding pattern or membership of the Company, does not amount to any change in management since there is no transfer or movement of the shares in the company. Induction of a new director into the Board would also not fall within the meaning of the expression transferee . In other words, a change in management of a Company should be of a nature so as to determine the ordinary Excise License in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the proviso to Rule 5(1) itself. 26. To hammer the disparity home, the exemption from payment of license fee pursuant to a change in management is much broader in the case of a public limited company where, apart from death of a director, any change in management in the usual course of business, would also entitle the public limited company for exemption. A private limited company, however, would get the benefit of exemption only upon death of a director and nothing more. Private limited companies have thus been left out of the purview of change in management in the usual course of business. 27. Therefore, increasing the zone for exemption for public limited companies from payment of license fees under the proviso to Rule 5(1) no doubt sets the ground for unequal treatment in the matter of payment of license fees for change in management. 28. The inequality must however be tested on whether the classification of private limited company and public limited company in clauses (d) and (e) respectively, satisfies the twin tests of a) being founded on an intelligible differentia, and b) the differentia having a rational nexus to the object sought to be achieved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erences since the State can step in through affirmative measures in aid of the constitutional goal of equality. However, the requirement which must be fulfilled is of shared characteristics of persons within a group which justifies their being grouped together as opposed to those who are outside the group. The distinction between those inside and those outside must be intelligible, that is, be measurable by reasonable parameters. The persons who have been excluded from the group must understand that they have been left outside the group in view of not possessing those defining features. 34. The test of intelligible differentia is vital to the constitutional charter of equality since creating groups is antithetical to equality. The distinguishing markers is the differentiator which justifies classification with or without those markers. It is of utmost importance that groups or classifications promote equality by way of intervention and do not undermine the same. 35. The State s power to take the vision of Article 14 forward cannot be done through random classifications where persons inside the class do not have homogeneous or defining features which distinguishes them from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght to the notice of the Collector within a period of 7 days, with application for regularization of the same along with a non-refundable application fee similar to the one applicable for grant of a new excise licence of the same category in the same local area : Provided further, that in cases of change in management from a firm/society/co-operative society to a company which is registered under the Companies Act, 1906, or from a private limited company to a public limited company and vice versa, or in case where there has been a takeover, or acquisition, or amalgamation, or merger of a private or public limited company holding an excise license by or with another company registered under the Companies Act, 1956, the management so changed, shall, subject to the requirement of prior approval, mentioned above, bring the matter to the notice of the Collector within a period of seven days, with application for regularization of the same along with a non-refundable application fee similar to the one applicable for grant of a new excise licence of the same category in the same local area: .. (3) On receipt of the application, the Collector, under whose jurisdiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany or, in other words, reducing the area of exemption for a Private Limited Company does not preserve the object of the 2009 Rules. The link between the classifications created under clauses (d) and (e) of the proviso to Rule 5(1) thus snaps and is broken in the attempt to connect it to the object of the 2009 Rules. 43. Therefore, the differentia made for classifying Private and Public Limited Companies under two separate groups under clauses (d) and (e) of the proviso to Rule 5(1) does not have an intelligible basis. The differentia for the classification do not also have a rational nexus to the object of the 2009 Rules. Article 14 prohibits unequal treatment of equals and vice-versa 44. The proposition that Article 14 prohibits unequal treatment of persons similarly-situated is too well-settled to merit a detailed discussion. The 2009 Rules clearly indicates that private limited companies and public limited companies are similarly-situated and have been treated as such in Rule 4(2). Therefore, clauses (d) and (e) of the proviso to Rule 5(1) violates the constitutional guarantee of equality by creating two separate groups/classifications for the purpose of exempti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s have made out a case for a declaration that clause (d) of the proviso to Rule 5(1) of the 2009 Rules is ultra vires to the Constitution of India. Response to the respondent s arguments 48. The respondent s arguments with the courts view are: a) Argument of the respondents: Rule 3 of the Notifications dated 11.2.2020 and 6.3.2020 has been substituted so as to incorporate the definition of change in management as given in the said Notifications. The Court The respondents say that since the definition has been brought by way of a substitution the same would relate back to the original Rule 5(2) and the proviso thereto and shall be deemed to have been given effect to from 2009. To understand the purport of the argument, the new definition given to change in management in the Notifications dated 11.2.2020 and 6.3.2020 are set out below. (i) Change in Management means, - (a) in case of Proprietorship Firm, when the proprietor nominates the trade licence in favour of any other nominee; (b) in case of a Partnership Firm or a Limited Liability Partnership (LLP) when any of the Partner retires or new Partner is inducted or the ratio of profit-sharin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed company. The uncertainty would also be at several levels. The present writ petition was filed in 2018 and is being disposed of in 2023. The Notifications of 2020 did not exist at the time of filing of the writ petition; hence, if the writ petition had been heard in 2018 or in 2019, the result would have been completely different. An adjudication cannot culminate in a different decision simply because the matter is being heard in 2023 and not in 2018/2019. Substitution must always lend clarity and add meaning to a provision. It cannot lead to anomalies and uncertainties. Further, the interpretation given to the new Notifications by the respondent presumes retrospective effect of the Notifications under the garb of substitution. A procedural statute cannot have retrospective application where the result would be creation of new disabilities, obligations or imposition of new duties in respect of a transaction which has already been accomplished; Maharaja Chintamani Saran Nath Shahdeo vs State of Bihar; (1999) 8 SCC 16. b) Argument of the respondents: Article 14 of the Constitution is not attracted since a private limited company falls in a different class from that of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ishan Singh v. Th. Ther Singh; AIR 1955 SC 795 is not applicable to the present facts since the basis of the decision was the failure of the petitioner to establish that the conditions which prevail in other areas in the State of Rajasthan are similar to those existing in the Marwar Region of the State. The issue before the Supreme Court was the constitutionality of certain sections of the Marwar Land Revenue Act No. 40 of 1949, where the argument was of violation of the fundamental rights of the petitioners under Article 14 of the Constitution. Is there any alternative to clause (d) to the Proviso to Rule 5(1) of the 2009 Rules being declared constitutionally invalid? 53. The offending clause namely (d) of the Proviso to Rule 5(1) may suitably be read up so as to include change in management in the usual course of business in case of a Private Limited Company in the same manner as provided in clause (e) to the Proviso to Rule 5(1) of the 2009 Rules. What is Reading Up ? 54. Constitutional Law experts and practitioners have often come across the expression - to read down a statutory provision where the width of the provision is shrunk or curtailed in orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3(6)(f). Death or retirement of a member or members or change in Management in the usual course or business of the Public or Private Limited Companies incorporated under the Companies Act, 1956 (Act 1 of 1956). The above reasons entitles the petitioner no. 1 to consequential relief 60. The sum of Rs. 64.50 lakhs which was paid / adjusted by the petitioner no. 1 in terms of the revised demand dated 27.2.2018 and the further sum of Rs. 5.5 lakhs, which was paid subsequent to filing of the present writ petition, aggregates to Rs. 70 lakhs. This amount should be refunded by the respondent authorities to the petitioner. 61. The impugned order dated 16.2.2018 is contrary to the interpretation given to the 2009 Rules as stated above. The Excise Commissioner relied on the Companies Act to hold that Private and Public Limited Companies have different fields of operation. The Excise Commissioner accordingly found that changes in the Board of Directors of the petitioner no. 1 should be construed as change in management and the petitioner no. 1 is accordingly liable to pay the fees stipulated in the Rules. The Collector of Excise, Kolkata (South) was consequently directed to r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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