Holding

The amendment imposing a cess on the production of electricity is ultra vires the Constitution because such a levy falls within Parliament’s exclusive power under Entry 84 of List I, and the 2003 Explanation cannot cure this defect.

Summary

The M.P. Cement Manufacturers' Association, representing captive power producers, challenged a 2001 amendment to the Madhya Pradesh Upkar Adhiniyam that imposed a cess of 20 paise per unit on electricity produced. The High Court held the cess was on consumption and within State competence under Entry 53 of List II. The Supreme Court examined the language of Section 3(2) and concluded the levy was on production of electricity, which falls under Entry 84 of List I, an exclusive Parliament power, rendering the amendment ultra vires. The Court also considered the statutory requirement to consult the Electricity Regulatory Commission under Section 12(3) of the Vidyut Sudhar Adhiniyam, finding non‑consultation a procedural defect but not fatal to the levy’s validity. It held that the 2003 Explanation could not cure the constitutional defect. Consequently, the amendment was declared invalid and the State was ordered to refund cess collected after 1 March 2002 with interest.

Issues considered

Whether the cess under Section 3(2) of the Upkar Adhiniyam, as amended, is levied on the production of electricity or on its sale/consumption.
Whether the State legislature has competence to impose such a cess under Entry 84 of List I or Entry 53 of List II of the Seventh Schedule.
Whether failure to consult the Electricity Regulatory Commission as mandated by Section 12(3) of the Madhya Pradesh Vidyut Sudhar Adhiniyam, 2000, invalidates the levy.
Whether the levy violates Article 14 of the Constitution.
Whether the 2003 Explanation can cure the constitutional defect in the 2001 amendment.

Legislation cited

Constitution of Indias. Article 14, s. List I Entry 84, s. List II Entry 53

Subjects

constitutional validitylegislative competenceexcise dutyelectricity cessEntry 84 List IEntry 53 List IIArticle 14consultation requirementExplanation to statuteultra viresrefund

Judgment

M.P. CEMENT MANUFACTURERS' ASSOCIATION A
V.

STATE OF MADHYA PRADESH AND OR.S.

DECEMBER 9, 2003
B
[RUMA PAL AND P. VENKATARAMA REDDI, JJ.]

Madhya Pradesh Upkar Adhiniyam, 1981 and Amendments made
thereunder by the Amending Acts of 2001 & 2003/Constitution of India
1950; Article 14, Entry 84 of List I and Entry 53 of List II to the Seventh C
Schedule:

Levy of energy development cess by the State Legislature-Amend-
ment in the Act-Constitutional validity of-High Court held that levy of
cess on electric energy consumed falls under Entry 53 ofList II to the VJ/th D

- Schedule-Hence valid-On appeal, Held: Despite explanation appended
to Section 3(2) by the amendment, charge continues to be on production
of electricity and nothing else-State Legislature intends to alter the
subject matter of levy-However, levy sought to be imposed only on
generation of electricity which falls under entry 84 of 'List I-State F;
legislature incompetent to impose such levy-Hence amendment ultra vires
l the Constitution-Interpretation of Statutes.

Madhya Pradesh Vidyut Sudhar Adhiniyam, 2000; Section 12(3) :
F
Consultation with Electricity Regulatory Commission before levy of
cess-Nature of-Held: Effect must be given to such statutory require-
ment-It is mandatory for the policy makers to consult the Commission
________ , before proposing any legislation on the subject ofelectricity-Consultation
serves as safeguard as against challenge under Article 14 ofthe Constitution. G

Words and Phrases:

'Whether/or sale or supply '~Meaning of In the context of Section
3(2) of the Madhya Prad~h Upkar Adhiniyam. H
557
558 SUPREME COURT REPORTS [2003] SUPP. 6 S.C.R.

A Appellants were owners of captive power plants. They have
challenged the constitutional validity of the amendment to the Madhya
Pradesh Upkar Adhiniyam whereby a cess of 20 paise per unit was
imposed on the electrical energy produced by them. The High Court
dismissed the writ petitions holding that ,the impugned cess was on
B electric energy consumed and thus falls under Entry 53, List II to the
VII Schedule of the Constitution, and the State legislature was com-
petent to levy cess and as such levy is not violative of Article 14. Hence
the present app~al and writ petitions.

It was contended for the appellant-Association that the State was
C incompetent to impose cess on the producti<m of electric energy since
the subject matter is covered exclusively by Entry 84 of List I to the
VII Schedule of the Constitution; that the statute was passed without
fulfilling the mandatory requirement of consultation with the Electric-
ity Regulatory Commission as per Section 12(3) of the Madhya·
D Pradesh Vidyut Sudhar Adhiniyam, 2000; that the levy was violative
of Article 14 of the Constitution; and that the effect of the Explanation
to Section 3(2) of the Act could be construed as either replacing the
import or alternative cess or additional cess.

E The Respondent-State contended that the levy imposed. by the
Amending Act, 2001 was on the electric energy sold or supplied .by_ or
from Captive Power Units and it was clarified further by ·introducing
the Explanation to Section 3(2) of the Adhiniyam and doubts, if any,
should be resolved in favour of upholding the Constitu~ional validity
of the amendment; that the State is competent to introduce such
F amendment, that since Madhya Pradesh. Vidyut Sudhar Adhiniyam
2000 was introduced later to the Legislation levying cess on electricity,
making the consultation with· the Commission necessary, such provi-
sion of law has no application on legislation o.n levy of cess on ~lectric
energy, that the Court could not review tbe Legislative process; and
G that there was no pleading to justify discrimination.

Allowing the appeal, the Court

HELD : 1.1. Electricity is go9ds. Thus, the levy of excise duty on
H the production of electricity which falls within the phrase "other goods
M.P. CEMENT MANUFACTURERS' ASSN. v. STATE 5,59

manufactured" in Entry 84 of List-I is within the exclusive j'!riS'diction A
-of Parliament and the State has the competence to levy tax only on the
sale and consumption of electricity. [565-F-GJ

Commissioner v. MPSEB, (1969) 1 SCC 200, 204 and Hoechst v.
Bihar, (1983) 3 SCR 130, relied on.
B
.
1.2. A plain reading of sub-section (2) of sub-section 3 introduced
by the amendment to the 1981 Adhiniyam makes it clear that the levy of
cess was "on the electrical energy produced". The phrase "whether for
sale or supply" merely clarified that all electricity produced irrespective
of its destination would be liable to cess at the specifi~d rate. The use of C
the word "whether" after the phrase "energy phoduced" means that the
cess would apply on units produced whichever of the alternatives
me'ntioned after the word "whether", namely, sale or supply or
consumption is the case. There is no reason to assume that the words
used did not reflect the intention of the Legislature. The imposition D
envisaged was on the production of electricity. The charge was on
generation and not on the sale or consumption of electricity. There is a
conscious linguistic departure from the language used in Section 3 of
the Electricity Duty Act, 1949 and indeed the language used in Section
3(1) of the sameAct where the cess is levied on the total units of electrical E
energy sold or supplied by distributors or electrical energy. When dealing
with producers under sub-section (2) of the same Section, the cess is
required to be paid "on the total units of electrical energy produced". If
the incidence of levy under Section (1) and sub-section (2) of the
Adhiniyam were identical, the same language should have been used in F
both sub-sections. The deliberate change in language reflects an intention
to alter the subject matter of levy as far as producers were concerned.
The intention of the Legislature was to levy cess on the production of
electricity is also borne out from the Statement of Objects and Reasons
which accompanied the Act. There can, in the circumstances, be no
doubt that the levy was sought to be imposed on the generation of G
electricity by the amendment, a levy which the State admittedly was
incompetent to impose. (569-C-D-E-F-G; 570-D-FJ

State of Mysore v. West Coast Paper Mills Ltd., fl975J J SCC 448,
relied on. H
560 SUPREME COURT REPORTS [2003] SUPP. 6 S.C.R.

A 1.3. The interpretation of the amendment by the High Court that
the cess was actually on sale and consumption and that production was
merely the measure of tax is unacceptable. Such a construction is contrary
to the express words of the statute. Doubtless, while considering a
challenge to the constitutionality of a statutory provision, the Court will
B lean in favour of upholding its validity. But this does not mean that in
this process of leaning the Court must perform verbal gymnastics to
overcome a patent lack of legislative competence. (570-G; 571-A]

Madhuram Agrawal v. State of Madhya Pradesh, (1999] 8 SCC 667,
followed.
c
State of Karnataka v. Ranganatha Reddy, (1977] 4 SCC 471, relied
on.

1.4. The Legislature has the power to validate an invalid levy and
D to do so retrospectively. The proscription provided in the context of
judicially invalidated legislation would not apply as the 2001 ·amend-
ment had not, till the promulgation of the 2003 Act, been held to be
invalid by any Court. The legislature can also change the character of
th.e tax or duty from impermissible to permissible but the tax or levy
should be within its legislative competence. These principles would not
E apply to the 2003 Amendment since it is in the form of an Explanation
to Section 3(2). (572-D-E)

S. Sundaram Pillai & Ors. v. V.R. Pattabiraman & Ors., [1985] 1
SCC 591 and Indian Aluminium Co. v. State ofKera/a, (1996) 7 SCC 637,
F relied on.

1.5. Since the purpose of sub-section (2) of Section 3 contin1;1es to
be a levy on production, the word 'levied' in the context would at the
highest mean 'assessment' and not 'imposition'. Thus despite the
Explanation, the charge in Section 3(2) continues to be on the produc-
G tion of the electrical energy units and nothing else. A charging
provision should be explicit, certain and' clear in order to bind the
subject. The outcome of the introduction of the Explanation to an
otherwise unchanged Section 3(2) of the Act is a singularly ill drawn
provision. The 2003 amendment was obviously introduced for the
H purpose of rectifying the obvious error in Section 3(2), an object which
M.P. CEMENT MANUFACTURERS' ASSN. v. STATE 561

cannot be achieved by introducing an Expianation sin~e an Explana- A
tion cannot be read as changing or as interfering with the incidence
of the levy. (573-H; 574-A-B-CI

1.6. The cess chargeable at all material times under Section 3(2)
of the Act is only on the production of electrical energy units as far
as producers of electricity for captive consumption are concerned and B
the Explanation does not serve to change the character of the tax from
an impermissible to a permissible levy. (574-GI

2.1. State legislature cannot be fettered from exercising its plenary
powers oflegislation within the ambit of the legislative heads specified in C
the lists (II) and (Ill) of the Seventh Schedule to the Constitution, unless

-
the prohibition is contained in the Constitution itself. It does not stop the
State from enacting th~ legislation but merely states that prior to any
legislation being proposed, the Government shall "duly take into account
the recommendation, if any, given by the Commissio1_1". It was and is
open to the State Legislature to repeal this law. As long as it continues to D
be operative, it must be assumed that it was not a mere exercise in futility
and some effect must be given to the words of the sub-section (3) of
Section 12 of the Act wherein it is a mandate to the policy makers who,
before proposing legislation, are required to consult the State Regulatory
Commission. [576-B, H; 577-A-Bl E
Maharaj Umeg Singh & Ors. v. The State of Bombay & Ors., (19551
2 SCR 164, relied on.

2.2. It is true that the 'Sudhar Adhiniyam, 2000 although pub-
lished in the Official Gazette prior to the promulgation of the im- F
pugned Ordinance, came. !nto force after such promulgation. Never-
theless, the Act which replaced the Ordinance was introduced as a Bill
when the Sudhar Adhiniyam was operative and was certainly in place
when the Explanation was added to Section 3(2) in 2003. There was
admittedly no consultation by the State Government with the Commis- G
sion at any stage though the levy of cess by the impugned legislation
affects the electricity industry. The consequence of non-consultation in
terms of Section 12(3) of the Sudhar Adhiniyam would not be an
incompetent piece of legislation but a legislation introduced in breach
of a salutary requirement to consult an expert statutory body. The
statutory requirement for consultation with a body of experts before H
562 SUPREME COURT REPORTS [2003] SUPP. 6 S.C.R.

A proposing legislation will serve as an in-built safeguard against a
challenge under Article 14 of the Constitution apart from anything
else. 1577-G-H; 578-A; F-GI

Narayanan Sankaran Maass v. The State of Kera/a & Anr., (1974)
2 SCR 60, relied on.
B •' .
2.3. The amounts collected by the respondents under Section 3(2)
of the Act is protected by the decision of the High Court. The
'protection' became precarious when this Court while granting leave
on the special leave petitions on 1st March 2002 had refused interim
C relief stating that the question of refund with interest was an issue to
be decided at the final hearing. In the circumstances, the respondents
are directed to refund the cess collected after 1st March, 2002 to the
appellants together with interest at 9% p.a. 1580-A-B)

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1998 of
D 2002.
From the Judgment and Order dated 21.11.200 I of the Ma~hya
Pradesh High Court in W.P. No. 3547 of 2001.

WITH •
E
C.A. Nos. 1999-2006, 2253-2254, 2538/2002, 9658, 9659, 9660/
2003, W.P. (C) Nos. 365/2002 and 236 of 2003.

R.F. Nariman, K.K. Venugopal, T.R. Andhyarujina, G.L. Sanghi,
V.A. Mohta, K. Parasaran, Harish N. Salve, Pankaj ·Rajmachikar, Mahesh
F Agarwal, Rishi Agrawala, E.c: Agrawala, Ms. Meera Agarwal, R.C.
Mishra, Niraj Sharma, Mannan, U.A. Rana, Arvind Kumar: Pravin Bahadur,
Ms. Vandana Chugh, Rajan Narain, Ms. Padmini Kumari, M.A. Chinasamy,
Arvind Minocha, 8.K. Satija, Nilesh, Satish K. Agnihotri, Ro~it K. Singh,
Anil K. Pandey, Pradeep Ranjan Tiwari and E.C. Agrawala for the
G appearing parties.

The Judgment of the Court was delivered ,by

RUMA PAL, J. Delay condoned.

H Leave granted in special leave petitions.
M.P. CEMENT MANUFACTURERS' ASSN. v. STATE [RCMA PAL, .I.] 563

The constitutional validity of the amendment to the Madhya Pradesh A
Upkar Adhiniyam 1981 (the 1981 Adhiniyam) is the subject matter of
challenge in these matters. The amendment was initially made by an
ordinance promulgated on 29th June 2001 by the. State Government and
entitled the "Madhya Pradesh Upkar (Sanshodhan) Adhyadesh, 200 I"
(hereafter referred to as the 'Ordinance'). By the amendment, a cess@ 20 B
paise per unit was imposed on the captive power producer on the total units
of electrical energy produced. The Act which has subsequently replaced
the Ordinance is known as the Madhya Pradesh Upkar (Sanshodhan)
Adhiniyam, 2001 (hereinafter referred to as 'the Amending Act'). The
provii;ions of the 2001 Ordinance and Act are identical.
c
The appellant in the first matter is an association representing the
interest of its members who are cement manufacturers and owners of
captive power plants. The connected appeals are by the captive power
producers themselves. The amendment has been challenged broadly
speaking on three grounds: first-that by the amendment the Legislature D
sought to impose a cess on the production of electrical energy which it was
legislative incompetent to do because any tax legislation on the production
of electricity is covered exclusively by Entry 84 of List-I to the Seventh
Schedule of the Constitution; second-that the Ordinance was passed
without fulfilling the mandatory pre-condition of consultation with the E
Electricity Regulatory Commission as provided under Section 12 (3) of the
Madhya Pradesh Vidyut Sudhar Adhiniyam, 2000; third-that the levy was
violative of Article 14 of the Constitution. Virtually the same arguments
were raised before the High Court.

The respondents are the State of Madhya Pradesh and the Madhya F
Pradesh State Electricity Board (MPSEB). They have submitted that the
word 'production' in the impugned amendment had been used in conjuction
with the phrase "whether for sale or supply to ..... " and was intended to
relate only to sale and consumption of electricity. An Explanation was
introduced by the Madhya Pradesh Upkar (Sansodhan) Adhiniyam, 2003 G
to clarify the ambiguity and to make it clear that the levy imposed by the
2001 amendment was on the electric energy sold or supplied by or from
captive power units. It was submitted that the doubt, if any, should be
resolved in favour of upholding the constitutional validity of the amend-
ment. lt was also contended that Entry 53 of List II was wide enough to H
564 SUPREME COURT REPORTS (2003] SUPP. 6 S.C.R.

A cover the exercise of power of the State Legislature in introducing the
impugned amendment. On the question of non-compliance with the
provision~ of Section 12 (3) of the Madhya Pradesh Vidyut Sudhar
Adhiniyam, 2000, it is stated that the Sudhar Adhiniyam was enacted on
3rd July 2001 whereas the impugned ordinance was promulgated on 29th
B June 2001 and as such, Section 12 (3) had no application. The further
argument is that Section 12 (3) of the Sudhar Adhiniyam ·could not be
construed as a restraint on the Legislature as no Legislature can bind any
future legislative action of the Legislature. The third contention on this
aspect is that the Courts could not review the legislative process. On the
C question of violation of Article 14, it is submitted that a cess is a tax which
may constitutionally be levied on the capacity of a particular class of
assessees to pay. ft is submitted that the appellants cannot be equated with
the MPSEB and that in any event there was no pleading to justify any
finding on the issue of discrimination.

D The High Cou11 dismissed the writ petitions. According to the High
Court the levy imposed by the impugned amendment was on sale and
consumption of electricity and that "by mere use of word "production" in
section 3(2) it does not cease to be cess on the consumption of electrical
energy". According to the High Court, "production is simply a measure
E •
of tax for the purpose of calculation of the amount of cess to be paid by
the Captive Power Producer whose plant is located in the factory premises
and whatever electrical energy is generated is consumed in the same
premises and on the units so consumed". The High Court concluded that
in substance, the impugned cess is on energy consumed and so falls under
Entry 53, List II, and was not excise duty even if the measure of both is
F at the same stage.

On the argument alleging violation of Section 12(3) of the Sudhar
Adhiniyam, it was held:

G "We find that imposition of cess was under consideration of the
State for some time past. It was discussed with the Industry and
formed part of Captive Power Policy before Ordinance was
promulgated. fn case the Respondents wanted to rush through the
measure, it could be done long back. It is not incumbent for the
Government to discuss a matter with public before it is legislated.
H
M.P. CEMENTMANUFACTIJRERS' ASSN. v. STATE [RUMA PAL J.] 565

Therefore, the Ordinance could be promulgated at any time, the A
Government deemed necessary to do so. Moreover, the Bill was
presented before the Legislature, which had passed it."

The plea of violation of Article 14 was negatived because a valid
distinction could be drawn between MPSEB and captive power generating B
concerns like the appellants. The cess of 20 paise per unit was held not
to be confiscatory and as such not violative of Article 14.

LEGISLATIVE COMPETENCE

The two competing entries in the Seventh Schedule to the Constitu-
tion are Entry 84 of List-I and Entry 53 of List -II, They respectively read: C

"List-I

"84. Duties of excise on tobacco and other goods manufactured
or produced in India except- D
(a) alcoholic liquors for human consumption.

(b) opium, Indian hemp and other narcotic drugs and narcotics,
but including medicinal and toilet preparations containing
alcohol or any substance included in sub-paragraph (b) of E
this entry.

List-II

"53. Taxes on the consumption or sale of electricity".

Electricity is goods (See Commissioner v. MPSEB, [1969] I SCC 200, p
204). Thus, the levy of excise duty on the production of electricity which
falls within the phrase "other goods manufactured" in Entry 84 of List-I"
is within the exch.~sive jurisdiction of Parliament and the State has the
competence to levy tax only on the sale and consumption of electricity'.
This position is accepted by the respondents. G
The Madhya Pradesh Electricity Duty Act, 1949 provides for the levy
of a duty on the consumption or sale of electrical energy and under Section
3 of this Act, subject to certain statutory exceptions, every distributor and

I. See Hoechst v. Bihar, [1983] 3 SCR 130. H
566 SUPREME COURT REPORTS [2003] SUPP. 6 S.C.R.

A every producer of electrical energy is required to pay a monthly duty "on
· the electrical energy sold or supplied to a consumer .or consumed by
himself, for his own purpose or for purposes of his township or colony".
Under the Upkar Adhiniyam, 1981, an energy development cess is levied
under Section 3 on every distributor of electrical energy at a rate of one
B paisa per unit "on the total energy sold or supplied to a consumer or
consumed by himself or his employees during any month". The similarity
in the phraseology used in both these statutes in describing the incidence
of tax - namely sale or supply of electricity - is significant.

By the impugned amendment in 2001, Section 3 of the 1981
C Adhiniyam was substituted to provide for payment of an Energy develop-
ment cess by producers of electricity as well. While setting out the
substituted section, we have highlighted those portions of the section which
were introduced by way of amendment.

"3. Levy of energy development cess - (1) Every distributor of
D electricity energy shall pay to the State Government at the
prescribed time and in the prescribed manner an energy develop-
ment cess at the rate of one paise per unit on the total units of
electrical energy sold or supplied to a consumer or consumed; by
himself or his employees during any month:
E
Provided that no cess shall be payable in respect of electric
energy,-

(i) (a) sold or supplied to the Government oflndiafor consump-
tion by that Government; or
F
(b) sold or supplied to the Government ofIndia or a railway
company for consumption in the construction, maintenance
or operation ofany railway administered by the Government
of India:
G (ii) sold or supplied in bulk to a Rural Electric Co-operative
Society registered under the Madhya Pradesh Co-operative
Societies Act, 1960 (No. 17 of 1961 ).

Explanation: For the purpose of this sub-section 'month'
H means such period as may be prescribed.
M.P. CEMENT MANUFACTURERS' ASSN. v. STATE [RUMA PAL .I.] 567
2. Every producer producing electrical energy by his captive A
power unit or diesel generator set of capacity exceeding I 0
Kilowatt in total shall pay to the State Government an energy
development cess at the rate of 20 paise per unit on the total units
of electrical energy produced whether for sale of supply to a
consumer or for consumption by himself or his employees during B
any month:

Provided that no cess shall be payable in respect of electrical
energy produced by -

{i) the Government of India for consumption by that Govern- C
ment;

(ii) the Government ofIndia or a railway company for consump-
tion in the construction, maintenance or operation of any
railway administered by the Government of India; D
(iii) the State Government for consumption by that Government;

(iv) a Rural Electric Co-operative Society registered under the
Madhya Pradesh Co-operative Societies Act, 1960 (No. 17
of 1961); E
(v) the local bodies including Municipal bodies and Panchayats
for consumption in public street lamp or lamps in any market
place or water works or any other places of public resort
maintained by such bodies :
F
Providedfurther that the amount ofenergy development cess shall
be collected by the Madhya Pradesh State Electricity Board and
the amount so collected shall be made available to the State
Government.
G
(3) The proceeds of the cess under sub-sections (I) and (2) shall
first be credited to the Consolidated fund of the State and the State
Government may at the commencement of each financial year,
after due appropriations has been made by law, withdraw from the
Consolidated Fund of the State an amount equivalent to the H
568 SUPREME COURT REPORTS [2003] SUPP. 6 S.C.R.

A proceeds of cess realized by the State Government in the preced-
ing financial year and shall place it to the credit of a separate fund
to be called the Energy Development Fund and such credit to the
said fund shall be an expenditure charged on the Consolidated
Fund of the State Government of Madhya Pradesh.

B (4) The amount in the credit of the funds shall, at the discretion
of the State Government be utilised for :-

(a) research and development in the filed of energy including
electrical energy as well as other conventional and non-
C conventional sources of energy;

(b) improving the efficiency of!l;eneration, transmission, distri-
bution and utilisation of energy including reduction of losses
in transmission and distribution;

(c) research in design, co11struction, maintenance, operation and
D
materials of the equipment used in the field of energy with
a view to achieve optimum efficiency, continuity and safety;

(d) survey of energy sources including non-perennial sources to
alleviate energy sho1tage.
E Energy conservation programmes ;
(e)

(t) Extending such facilities and services to the consumers as
may be deemed necessary;

(g) Creation of a laboratory and testing facilities for testing of
F electrical appliances and equipments and other equipments
used in the field of energy;

(h) Programmes of training conducive to achieve any of the
above objectives;
G (i) Transfer of Technology in the field of Energy;

G) Any purpose connected with improvement of generation,
transmission, distribution or utilisation of electrical and
other forms of energy, as the State Government/ may, by
H notification, specify.
M.P. CEMENT MANUFACTURERS' ASSN. v. STATE [RUMA PAL. J.] 569

Explanation: In this sub-section 'energy' includes all con- A
ventional and non-conventional forms of energy.

(5) If any questions arises as to whether the purpose for which
the fund is being utilised is a purpose falling under sub-section
(4) or not, the decision of the State Government thereon shall be B
final and conclusive."

The High Court's decision was given with reference to this amend-
ment.

A plain reading of Sub-Section (2) of Sub-Section 3 introduced by C
the amendment to the 1981 Adhiniyam makes it clear that the levy of cess
was "on the electrical energy produced". The phrase "whether fo1' sale or
supply" merely clarified that all electricity produced irrespective of its
destination would be liable to cess at the specified rate. The use of the word
"whether" after the phrase "energy produced" means that the cess would D
apply on units produced whichever of the alternatives mentioned after the
word "whether", namely, sale or supply or consumption is the case. There
is no reason to assume that the words used did not reflect the intention of
the Legislature. The imposition envisaged was on the production of
electricity units. The charge was on generation and not on the sale or E
consumption of electricity. There is a conscious linguistic departure from
the language used in Section 3 of the Electricity Dufy Act, 1949 and indeed
the language used in Section 3(1) of the same Act where the cess is levied
on the total units of electrical energy sold or supplied by distributors of
electrical energy. When dealing with producers under sub-Section (2) of
the same section, the cess is required to be paid "on the total units of F
electrical enel'gy produced". If, as is contended by the respondents, the
incidence of levy under Section (I) and sub-section (2) were identical, the
same language should have been used in both sub-sections. The deliberate
change in language reflects an intention to alter the subject matter of levy
as far as producers were concerned. G
Our interpretation of sub-section (2) of Section 3 is buttressed by and
in keeping with the language and effect and the proviso to the said sub-
section. It has been held that the normal function of the proviso is to except
something out of the enactment or to qualify something enacted therein H
570 SUPREME COURT REPORTS [2003] SUPP. 6 S.C.R.

A which but for the proviso would be within the purview of the enactment2.
The proviso to Section 3(2) excepts "'e.lectrical energy produced'' from
payment of the cess in five cases. This would show that the general
application of Section 3(2) to which an exception was being carved by the
proviso was in respect of the production of electrical energy. Were it not
B for the exception in the proviso to Section 3(2), What would be subjected
to tax would be electrical energy produced by the five categories mentioned
under the proviso. Although in categories (i), (ii), (iii) and (v) the
exemption is granted with reference to the utilisation of the electrical
energy produced, under exception (iv) - significantly, all electrical energy
C produced by a Rural Electrical Co-operative Society registered under the
M.P. Co-operative Societies Act, 1960 is exempted. T.he difference of
language between the proviso to sub··section (2) ·of Section 3 and the
proviso to sub-section (1) of Section 3 is also telling. Under the proviso
to sub-section (I), the exception is of electrical energy sold or supplied to
specified authorities.
D
That the intention of the Legislature was to levy cess on the
production of electricity is also borne out from the Statement of Objects
and Reasons which accompanied the Act which replaced the Ordinance.
It says:
E "With a view to impose cess .on the electricity generated by the
producers from their Captive Power Plants/Diesel G~nerating Sets
for self consumption or for sale at the rate of 20 paise per unit
on all generated electricity units, it has been decided to amend the
Madhya Pradesh Upkar Adhiniyam, I 981 (No. I of 1982)
F suitably."

There can, in the circumstances, be no doubt that the levy was sought
to be imposed on the generation of electricity by the amendment, a levy
which the State admittedly was incompetent to impose 3 •
G The interpretation of the amendment by the High Court and as
canvassed by the respondents that the .cess was actually on sale and
consumption and that production was merely the measure of tax is
2. Kedar Nath Jute Manufacturing Company Ltd. v .. Commercial Tax Officer.
[1965] 3 SCR 626.
H 3. See: State of A{vsore v: West Coast Paper Mills Ltd., [1975] 3 sec 448
M.P. CEMENT MANUFACTURERS' ASSN. v. STATE [RUMA PAL. .I.] 571

unacceptable. Such a construction is contrary to the express words of the A
statute. Doubtless, while considering a challenge to the constitutionality of
a statutory provision, the Court will lean in favour of upholding its validity
(See: State of Karnataka v. Ranganatha Reddy, [1977] 4 SCC 471). But
this does not mean that in this process of learning the Coutt must perform
verbal gymnasitcs to overcome a patent lack of legislative competence. As B
said by the Constitution Bench of this Coutt in Madhuram Agrawal v. State
of Madhya Pradesh, [1999] 8 SCC 667:

"The intention to the legislature in a taxation statute is to be
gathered from the language of the provisions particularly where
the language is plain and unambiguous. In a taxing Act it is not C
possible to assume any intention or governing purpose of the
statute more than what is stated in the plain language. It is not the
economic results sought to be obtained by making the provision
which is relevant in interpreting a fiscal statute. Equally imper-
missible is an interpretation which does not follow from the plain, D
unambiguous language of the statute. Words carinot be added to
or substituted so as to give a meaning to the statute which will
serve the spirit and intention of the legislature."

Although a dispute was sought to be raised by the appellants as to
whether electricity can be stored or not, (this despite the decision to the E
contra'.)' by the Constitution Bench of this Court in State of Andhra
Pradesh v. National Thermal Power Corpn. Ltd., [2002] 3 SCC 203, it is
not necessary to enter into this controversy for the purpose of deciding this
issue as it is the common case of the parties before us that between the
generation and consumption of electricity there will be transmission loss F
and the amount of electricity generated need not necessarily be the amount
of electricity consumed/sold. In any event, the practice which is actually
followed in metering the generated electricity would not make the inci-
dence of tax different. "The me!hod of collection does not affect the
essence of the duty, but only relates to the machinery of collection for G
administrative convenience. Whether in a particular case the tax ceases to
be in essence an excise duty, and the rational connection between the duty
and the person on whom it is imposed ceased to exist, is to be decided on
a fair construction of the provisions of a pa1ticular Act"4 Section 3(2) of
4. See: R:c. Jail v. Union of India. [1962) Supp. 3 SCR 436. H
572 SUPREME COURT REPORTS [2003]·SUPP. 6 S.C.R.

A the amendment speaks of cess on electrical energy generated and that must
be taken as conclusive of the object and nature of the levy.

Had matters stood there, the appeals would have had to be allowed
and the decision of the High Cou1t reversed. But after the decision of the
B High Court, there was a fu1ther amendment effected to the 1981 Adhiniyam,
by the Madhya Pradesh Upkar (Sanshodhan) Adhiniyam, 2003. The 2003
amendment introduced an Explanation at the end of Section 3 of sub-
Section (2). The Expianation is as follows:-

"Explanation - For the purpose of this sub-section, the Cess shall
c be levied on units of electrical energy sold or supplied from
captive power units or Diesel Generator sets to a consumer or
consumed by the Producer or his employees.".

The issue now is - can the 2003 Explanation cure the 2001 levy?

D The legislature has the power to validate an invalid levy and to do
so retrospectively. The proscription provided in the context of judicially
invalidated legislation would not apply as the 2001 amendment had not,
till the promulgation of the 2003 Act, been held to be invalid by any Court.
The legislature can also change the character of the tax or duty from
E impermissible to p~rmissible but the tax or levy should be within its
legislative competence5 • However, in our view, these principles would not
apply to the 2003 Amendment since it is in the form of an Explanation
to Section 3(2). The object of an Explanation tc a statutory provision has
been culled out from the earlier judicial decisions and succinctly restated
F in S. Sundaram Pillai & Ors. v. V.R. Pattabiraman & Ors., [1985] I SCC
591 at 613.

I
"Thus, from a conspectus of the authorities referred to above, it I
is manifest that the object of an Explanation to a statutory
provision is -
G
(a) to explain the meaning and intendment of the Act itself,

(b) where there is any obscurity or . vagueness in the main
enactment, to clarify the same so as to make it consistent
H 5. Re: Indian Aluminium Co. v. Stale of Kera/a, (1996] 7 sec 637, 663.
M.P. CEMENT MANUFACTURERS' ASSN. v. STATE [RUMA PAL J.] 573

with the dominant object which it seems to subserve, A

(c) to provide an additional suppo1i to the dominant object of
the Act in order to make it meaningful and purposeful,

(d) an Explanation cannot in any way interfere with or change B
the enactment or any pa1i thereof but where some gap is left
which is releYant for the purpose of the Explanation, in order
to suppress the mischief and advance the object of the Act
it can help or assist the Court in interpreting the true purpoti
and intendment of the enactment, and
c
(e) it cannot, however, take away a statutory right with which
any person under a statute has been Clothed or set at naught
the working of an Act by becoming an hindrance in the
interpretation of the same."
D
According to the appellants, since Section 3(2.) continued to remain
. the charging Section, the effect of the Explanation could be construed
either as replacing the impose under Section 3(2) or as an alternative cess
or as being an additional cess. The first con.struction had not been argued
by the respondents. The second alternative would give the assessing officer E
an impermissible discretion and the third alternative would mean that the
vice of constitutional incompetence would continue to attach to the
impugned levy.

The respondents have argued that the decision of the High Court with F
regard to the interpretation put to Section 3(2) is correct. Indeed, they could
hardly contend otherwise. We have not agreed with the interpretation of
Section 3(2) put by the High Court judgment. Section 3(2) continues to
be the charging Section. The Explanation, according to the respondents
served the purpose of merely clearing up any ambiguity in Section 3(2) G
and reaffirmed the object of the cess levied thereunder.

The expression. used' by the Explanation is "for the purpose of sub-
section (2) of Section 3, the cess shall be levied on units of electrical energy
sold or supplied". Since the purpose of sub-section (2) of Section 3 H
574 SUPREME COURT REPORTS [2003) SUPP. 6 S.C.R.

A continues to be a levy on production, the word 'levied' in the context would
at the highest mean 'assessment' and not imposition'. It is not the
respondents' case that any new or additional or alternative cess was sought
to be introduced by the Explanation. Thus despite the Explanation, the
charge in Section 3(2) continues to be on the production of the electrical
B energy units and nothing else. The proviso to sub-section (2) of Section
3 continues to except electrical energy produced from the cess in certain
cases. The Explanation, if it is read with the main provision, introduces
certain contradictions and vagueness. A charging provision should be
explicit, certain and clear in order to bind the subject. The outcome of the
C introduction of the Explanation to an otherwise unchanged Section 3(2) is
a singularly ill drawn provision. The 2003 amendment was obviously
introduced for the purpose of rectifying the obvious etTor in Section 3(2),
an object which cannot be achieved by introducing an Explanation since
an Explanation cannot be read as changing or as interfering with the
incidence of the levy. It is not for us, particularly when legislative clarity
D is required since the statutory provision imposes a tax, to untangle the
legislative confusion.

The legislature could have avoided the controversy, if it had wished
to make the incidence of tax explicitly on sale or consumption, by the
E simple expedient of so providing. The Legislature in its wisdom did not
choose to do so. To use the words voiced by Jassel M.R. 6 :

"I must say that whoever is responsible for drafting ..... of this

F
Act.. ..... has taken a great deai of trouble to raise a very difficult
question, when he might with the greatest ease by using appro-
priate and well-known terms have avoided any question what-
ever."
-
I

We are, therefore, of the opm1on that the cess chargeable at all
material times under Section 3(2) is only on the production of electrical
G energy units as far as producers of electricity for captive consumption are
concerned and the Explanation does not serve to change the character of
the tax from an impermissible to a permissible levy.

6. In Spencer v. Metropolitan Board or Works. [1882] ~2 Ch. D. 142. 161 and Cf
Metropolitan Water Board v. L.B. & SC. Ry.. [1910] 2 K.B. 890, 985, Cozens Hardy
H M.R.
M.P. CEMENT MANUFACTURERS' ASSN. v. STATE [RUMA PAL J.] 575

SECTION 12(3) OF THE SUDHAR ADHINIYAM A
The challenge to Section 3(2) of the 1981 Adhiniyam on the ground
of violation of Section 12 (3) of the Madhya Pradesh Vidyut Sudhar
Adhiniyam, 2000 (hereinafter referred to as 'Sudhar Adhiniyam') is not
necessary to be decided in view of our interpretation of the Section and
the finding that it was an incompetent piece of legislation. However, since B
the scope of Section 12(3) of the Sudhar Adhiniyam has been argued in
depth, we think it appropriate not to leave the dispute unanswered.

The Sudhar Adhiniyam was published in the Madhya Pradesh Gazette
(Extra-Ordinary) on 20.2.200 I after receiving the assent of the President. C
It came into force on 3.7.2001. By the Sudhar Adhiniyam, the State
Electricity Regulatory Commission has been set up and various provisions
have been made for the following avowed objects :

"(i) restructuring of the Electricity Industry;
D
(ii) rationalisation of Generation, Transmission, Sub-Transmis-
sion, Distribution and Supply of Electricity in the State;

(iii) Regulating the licensing of transmission and supply of
electricity; E
(iv) regulating the purchase, Transmission, Sub-Transmission,
Distribution, Supply and utilisation of electricity;

(v) providing quality of service and the tariff and other charges
considering the interest of the consumers and utilities; F
(vi) taking measures conducive to the development and manage-
ment of the electricity industry in the State in an efficient,
economic and competitive manner."

Section 12(3), which is allegedly violated by the respondent-State, G
reads as under :

"12 (3). The State Government shall consult the Commission in
relation to any policy directive which it proposes to issue or any
legislation is proposed to be enacted affecting the Electricity H
576 SUPREME COURT REPORTS [2003) SUPP. 6 S.C.R.

A Industry it shall duly take into account the recommendation if any,
given by the Commission within such reasonable time as the State
Government may specify."

There can be no doubt, in view of the authoritative pronouncement
B of the law in Maharaj Umeg Singh and Others v. The State of Bombay and
Others, [1955) 2 SCR 164 that a State legislature cannot be fettered from
exercising its plenary powers of legislation within the ambit of the
legislative heads specified in t,he lists (II) & (III) of the 7th Schedule to
the Constitution, unless the prohibition is contained in the Constitution
itself. It had been argued in Maharaj Umeg Singh 's case that agreements
C of merger entered into by the Rulers of the respective States with the
Dominion of India and the collateral letters of guarantee passed by the
Ministry of States precluded the State legislature from denying the rights
under these two instruments. The argument was negatived saying :

"Once the topic of legislation was comprised within any of the
D
entries in the Lists II & III of the Seventh Schedule to the
Constitution the fetter or limitation on such legislative power had
to be found within the Constitution itsetf and ifthere was no such
fetter or limitation to be found there the State Legislature had full
competence to enact the impugned Act no matter whether such
E enactment was contrary to the guarantee given, or the obligatiQn
undertaken by the Dominion Government or the Province of
Bombay or even the State of Bombay".

Unlike the decision in Maharaj Umeg Singh 's case, the so-called
F legislative 'fetter' in the case before us is itself contained in valid
legislation viz. the Sudhar Adhiniyam, 2000. The State was competent to
enact the Sudhar Adhiniyam, 2000. The respondents have not urged to the
contrary. So now we have two pieces· of legislation viz, the Sudhar
Adhiniyam, 2000 and the Amendment Act of 2001, both enacted by the
G State which are both equally valid.

The first question, therefore, is - whether Section 12(3) does in fact
impose any fetter on the power of State to legislate? Sub-section (3) refers
to "any policy directive which it proposes to issue" or "ariy legislation
proposed to be enacted affecting the Electricity Industry". It does not stop
H the State from enacting the legislation but merely states that prior to any
M.P. CEMENT MANUFACTURERS' ASSN. v. STATE [RUMA PAL, J.] 577

legislation being proposed, the Government shall "duly take into account A
the recommendation, if any, given by the Commission''. It was and is open
to the State Legislature to repeal this law. A.s long it continues to be
operative, it must be assumed that it was not a mere exercise in futility and
some effect must be given to the words of the sub-section (3) of Section
12. As we read the sub-section, it is a mandate to the policy makers who, B
before proposing legislation, are required to consult the State Regulatory
Commission.

Under the Sudhar Adhiniyam, the State Commission is a juristic
entity [Section 3(1)]. The Members of the Commission, according to
Section 5 of the Sudhar Adhiniyam, shall be persons of ability, integrity C
and standing who have adequate knowledge and experience of, or have
shown capacity in dealing with problems relating to engineering, econom-
ics, commerce, finance, law, administration or management.. ... ". Under
Section 9 of the Sudhar Adhiniyam, the Commission has been vested with
the powers inter alia- D

(a) to regulate the purchase, distribution, supply and utilization
of electricity, the quality of service, the tariff and charges
payable considering the interest of the consumer and the
Electricity Industry both; E
(c) to determine the tariff for electricity, wholesale, bulk grid
or retail in accordance with the provifions of the Act.

In particular the Commission has been given the power to determine F
the tariff under Section 26 of the Sudhar Adhiniyam, 2000. For discharging
its functions, the Commission has been given wide ranging powers to carry
out the objects for which it had been set up including the powers of a Civil
Court in certain specified matters (Section 10).

It is true that the Sudhar Adhiniyam, 2000 although published in the G
Official Gazette prior to the promulgation of the impugned Ordinance,
came into force after such promulgation. Nevertheless, the Act which
replaced the Ordinance was introduced as a Bill when the Sudhar Adhiniyam
was operative and was certainly in place when the Explanation was added
to Section 3(2) in 2003. There was admittedly no consultation by the State H
578 SUPREME COURT REPORTS [2003] SUPP. 6 S.C.R.
A Government with the Commission at any stage though the levy of cess by
the impugned legislation affects the electricity industry.

We are not concerned with why the. legislature provided for this
mandate or prior consultation but the importance of consultation at a pre-
B decisional stage has been recognised by Narayanan Sankaran Mooss v.
The State of Kera/a and Another, [1974] 2 SCR 60, page 70:-

" ...... First impressions and provisional judgments have a tendency
to become ultimate ideas and final judgments. They would settle
unconsciously on the investigator's mind as the imperceptible
c dust-particles on an optical lens. They would dim his understand-
ing and obfuscate his observation. Facts which will dovetail with
them would arrest his attention; facts which will conflict with
them would fit his observation. If by ariy chance he happens to
notice refractory facts, he would seek to reconcile them with his
D first impressions and provisional judgment. This understanding of
human psychology seems to have pt1suaded Parliament to inter-
pose the condition of the Board's consultation to the Govern-
ment's action. The Board is an independent body. It consists of
three members. One of them is a technical expert, the other is
E financial expert, and the third an administrative expert. While
considering the facts present~d to it by the Government and by
the licensee in his explanation, the Board will undoubtedly act
with an open and unconditioned mind and will be able to offer.
unbiased counsel to the Government.. ... "

F In our opinion, the consequence of non-consultation in terms of
Section 12(3) of the Sudhar Adhiniyam would not be an incompetent piece
of legislation but a legislation introduced in breach of a salutary require-
ment to consult an expert statutory body. The statutory requirement for
consultation with a body of experts before proposing legislation will ser1e
G as an in-built safeguard against a challenge under Article 14 of the
Constitution apart from anything else.

Nevertheless, we do not propose to decide - whether by reason only
of such non-consultation, Section 3(2) of the 1981 Adhiniyam is violative
H of Article 14, nor do we propose to decide whether the cess of 20 paise
M.P. CEMENT MANUFACTURERS' ASSN. v. STATE (RUMA PAL, J.] 579

is excessive, nor the other grounds urged by the appellants pertaining to A
Article 14. We have referred to the provisions ofSudhar Adhiniyam so that
the State Government may in future act in consonance with Section 12(3).

An additional challenge has been raised to the constitutional validity
of sub-sections (3), (4) and (5) of Section 3 in Civil Appeal No.2003 of B
2002 alleging violation of Articles 202, 204, 207, 260 and 267 of the
Constitution.

In order to appreciate the submission, we may recapitulate briefly the
effect of these sub-sections. Under sub-section (3), the proceeds of the cess C
levied under sub-sections (1) and (2) are required to be credited to the
Consolidated Fimd of the State. The State Government may then withdraw
an amount equivalent to the proceeds of cess realised in the preceding
financial year and place it to the credit of a separate fund called the Energy
Development Fund. Such credit to the fund would be an expenditure
charged on the Consolidated Fund. The State Government has also the D
discretion to use the amount in the credit for the various purposes specified
in sub-section (4). A further discretion is given to the State Government
under sub-section (5) to finally and condusively decide whether the funds
were in fact being utilised for a purpose falling under sub-section (4).
E
Apart from the submission that the respondents had not disclosed any
information as to what had been done by the State after collecting the cess
from its consumers and how the cess collected in fact been utilised since
1981 although called upon to do so, it is argued by the appellants that no
fund could be earmarked or appropriated or expended from the Consoli- F
dated Fund of the State except in accordance with the provisions of Articles
196, 198, 199 and 200 of the Constitution which requires the expenditure
to be passed by the State Legislature and it cannot be left to the State
Executive to determine the expenditure at its discretion. This argument was
raised before the High Court but not dealt with. Nor do we do so since
we have upheld the appellants' contentions on the very imposition of the G
cess under Section 3(2).

In the circumstances, we allow the appeals. Section 3(2) of the Upkar
Adhiniyam, 1981 as introduced by the Amendment Act, 2001 and amended
in 2003 is declared ultra vires the Constitution as being outside the H
580 SUPREME COURT REPORTS [2003) SUPP. 6 S.C.R.

A legislative competence of the State. As far as amounts collected by the\
respondents under Section 3(2) are concerned, the collection was in a sense
protected by the decision of the High Couit. The 'protection' became
precarious when this Cou1t while granting leave on the special leave
petitions on 1st Marnh, 2002 had refused interim relief stating that the
B question of refund with interest was an issue to be decided at the final
hearing. In the circumstances, we direct that the respondents will be liable
to refund the cess collected after 1st March, 2002 to the appellants together
with interest at 9% p.a. There will however be no order as to costs ...

WRIT PETITION (C) NOS. 356 OF 2002 AND 236 OF 2003.
c
In terms of our above judgment, the writ petitions stand disposed of
accordingly.

s.r<..s. Appeals allowed/Petitions disposed of.