Holding

The Bihar Excise Act, 1915 (as amended) and the 1988 notifications are valid; the State may regulate the use and possession of medicinal preparations containing alcohol as alcoholic beverages under Entry 8 and Entry 6 of List II, without repugnancy to Union legislation, and the fees are permissible regulatory charges.

Summary

The State of Bihar enacted notifications licensing the use, possession and sale of Ayurvedic medicinal preparations containing alcohol, after amending the Bihar Excise Act, 1915 to include such preparations within the definition of "intoxicant". Manufacturers challenged the constitutional validity of the amendment and the notifications, alleging that the State had exceeded its legislative competence, encroached upon Union legislation (Medicinal & Toilet Preparations Act, 1955 and Drugs Act, 1940), imposed an excise duty violating Article 301, discriminated against Unani medicines in breach of Article 14, and that the fees were not a legitimate regulatory charge. The Supreme Court held that the State's power to regulate use and possession of these preparations as alcoholic beverages falls under Entry 8 (intoxicating liquor) read with Entry 6 (public health) of List II, distinct from the Union's taxing power under Entry 84 of List I, and therefore the Bihar Act and the notifications are constitutionally valid. The Court further held that the fees are regulatory, not excise duty, and the classification excluding Unani medicines is reasonable. Consequently, the appeals were allowed, setting aside the High Court judgment.

Issues considered

The constitutional competence of the Bihar Legislature to amend the definition of "intoxicant" to include medicinal and toilet preparations containing alcohol
Whether the Bihar Act and the notifications encroach upon the Union's Medicinal & Toilet Preparations (Excise Duties) Act, 1955 and the Drugs and Cosmetics Act, 1940
Whether the fees levied under the notifications constitute an excise duty in violation of Article 301
Whether the exclusion of Unani medicines from the notifications violates Article 14
Whether the amendment represents a colourable exercise of legislative power

Legislation cited

Bihar Excise Act, 1915s. 13, s. 19, s. 2(12a), s. 38, s. 39, s. 5, s. 90
Constitution of Indias. Article 14, s. Article 245, s. Article 246, s. Article 254, s. Article 301
Drugs and Cosmetics Act, 1940s. 2, s. 3

Subjects

legislative competencestate vs union legislationexcise dutyintoxicant definitionAyurvedic medicinal preparationsArticle 14Article 301regulatory feepith and substancerepugnancyList IIList IList III

Judgment

A STATE OF BIHAR AND ORS.
V.

SHREE BAIDYANATH AYURVED BHAWAN (P) LTD. AND ORS.

JANUARY 11, 2005

B [S.N. VARIAVA, DR. AR. LAKSHMANAN AND S.H. KAPADIA, JJ.]

Excise Laws:

Bihar Excise Act, 1915(as amended by Act No.6 of 1985): Sections
C 2(12a), 5, 13, 19, 38, 39 and 90-1nclusion of 'medicinal and toilet
preparations' containing alcohol defined under the Medicinal A ct in definition
of word 'intoxicant' in Section 2(12a)-Notification thereunder seeking to
licence and regulate on payment of fees, use and possession of Ayurvedic
medicinal preparation containing alcohol-Validity of-Held: Bihar Act and
D Notifications issued valid-Bihar Act covers use and possession of medicinal
preparations containing alcohol, relatable to Entry 8 read with Entry 6 ofList
//-Medicinal Act provides for levy of excise duty on medicinal and toilet
preparation containing alcohol, relatable to Entry 84 List I-Drugs Act regulate
manufacture of Ayurvedic drugs for sale, relatable to Entry 19 of List.II/-
Hence, subject matter ofState Act and Central Acts operate in different fields
E and cannot coriflict-There is no incidental trenching-Bihar Act not repugnant
to Medicinal Act and Drugs Act-Further, since licence and regulation of use
and misuse of medicine an enormous activity involving heavy expenditure, the
State and the Board competent to issue Notification under sections 5, 19(4),
38, 39 and 90 of the 1915 Act-Notifications did not encroach upon field
F occupied by Central Acts-Furthermore, fees levied being regulatory in nature
for which quid pro quo not necessary and also not voilative of Article 301-
Exclusion of Unani medicines from the Notifications not violative of Article
14-Medicinal and Toilet Preparation Excise Duties Act, 1955-Drugs Act,
1940-Constitution of India, 1950-Articles 14, 245, 246, 254, 301 Schedule
G VII List I Entry 84, List II Entry 6 and 8, Entry 19 List /JI.
By Bihar Amendment Act No. 6of1985 word 'intoxicant' in section >'
2(12a) of the Bihar Excise Act, 1915 was redefined by including therein
y
"medicinal and toilet preparations" containing alcohol as defined under
the Medicinal and Toilet Preparations (Excise Duties) Act, 1955.
H Thereafter, Notification No.2/23-3-88/1, 2/23-3-88/2, 2/23-3-88/3 dated 3rd
334
STATE r. BAIDYANATHAYURVEDBHAWAN(P)LTD. 335
August, 1988 were issued whereby State as well as Board of Revenue is A
seeking to licence and regulate on payment of fees, use and possession of
Ayurvedic preparation containing alcohol. Manufacturers of Ayurvedic
medicinal preparation challenged the constitutional validity of section
2(12A)(iv) of Bihar Act and also power of the State and the Board. High
Court held that the State Legislature erred in including "medicinal B
preparation~' within the meaning of the word "intoxicant" under section
2(12a) of the Bihar Act as the said item has been set apart by the
Constitution for Parliamentary legislation; that this exercise amounted to
colourable exercise of the power, that the levy of fees wa~ in substance an
excise duty, as such violated Article 301; that the exclusion of Unani
medicines from the operation of the impugned notifications was violative C
of Article 14 and hence, set aside the Notifications. Hence, the present
appeals.

Allowing the appeals, the Court

HELD: 1. The Bihar Excise Act, 1915 is constitutionally valid and D
also the imugned Notifiication/Communication No.2/23-3-88/l, 2/23-3-88/
2, 2/23-3-88/3 dated 3rd August 1988, are valid. 1359-GI

2.1. The Scheme of the Bihar Excise Act, 1915 (as amended by Act
No.6 of 1985) seeks to license and regulate use (including consumption)
and possession of medicinal preparations containing alcohol as alcoholic E
beverages. The 1915 Act regulates use, possession, transport, import and
export of intoxicants. It regulates use and possession of medicinal and toilet
preparation as alcoholic beverage. Section 2 (12a) of the Act defines the
word 'intoxicant' to mean liquor or any substance from which liquor may
be distilled or intoxicating drug or medicinal preparation as defined under F
the Medicinal and Toilet Preparations Act, 1955. It is relatable to Entry
8 (intoxicating liquor) read with Entry 6 (Public health) of List II in the
Schedule VII. 1345-A; 346-D; 343-C; 346-DI

2.2. The Scheme of Medicinal and Toilet Preparations Act, 1955
provides for levy and collection of excise duty on medicinal and toilet G
preparations containing alcohol, opium or any other narcotic drugs and
not on its use and possession as alcoholic beverages. Section 3 of the 1955
Act seeks to levy excise duty on medicinal and toilet preparations
containing alcohol. It is relatable to Entry 84 of List l which deals with
taxation. Hence, the two Acts operate in different fields.1345-F; 346-C-DI H
336 SUPREME COURT REPORTS 12005] I S.C.R.

A 2.3. The instant case deals with use and possession of substances
containing alcohol capable of being used as alcoholic beverages. The 1915
Act covers use and possession of medicinal preparations containing
alcohol, which subject matter is not covered by the 1955 Act. Therefore,
the subject matter of the Bihar Act as amended cannot conflict with the
B 1955 Act. 1351-F; 352-A; 346-EI

Adhyaksha Mathur Babu 's Sakti Oushadhalaya Dacca (P) ltd and Ors.
v. Union of India, AIR (1963) SC 622, distinguished.

State of UP. and Anr. v. Synthetics and Chemicals ltd and Anr., (1991 I
C 4 SCC 139; The Hyderabad Chemical and Pharmaceutical Works Ltd. v. State
of Andhra Pradesh and Anr., AIR (1964) SC 1870; State of Bihar and Ors.
v. Industrial Corporation (P) Ltd. and Ors., (2003111 SCC 465 and Synthetics
and Chemicals Ltd. v. State of UP., (1990( I SCC 109, referred to.

2.4. Medicinal Act, 1955 levies duty on the manufacture of Ayurvedic
D medicines containing alcohol. However, when the Ayurvedic preparation
is diverted to human consumption as alcoholic beverages, the State shall
have the power to .regulate and control such use. It is the subject of the
Bihar Act, 1915. Hence, the State Act is relatable to Entry 8 read with
Entry 6 of List which is general subject of legislation. Medicinal Act, 1955
E is relatable to Entry 84 List-I which deals with taxing power. Therefore
the two Acts are in different spheres. There is no trenching even
incidentally by the Bihar Rules and the impugned notifications into the
provisions of the Medicinal Act, 1955 read with the Rules. It is well settled
that even if at all there is any trenching or incidental encroachment such
encroachment will not affect the competence of the Legislature to enact
F the law nor will it affect its validity. (353-F-G; 355-A-B; 355-CI

Bihar Distillery and Anr. v. Union of India and Ors., (1997( 2 SCC 727;
Vam Organic Chemicals Ltd and Anr. v. State of UP. and Ors., 11997( 2
SCC 715; Har Shankar and Ors. v. Deputy Excise and Taxation Commissioner
and Ors., (1975( I SCC 737; State of Andhra Pradesh and Ors. v. Mcdowell
G and Co. and Ors., ( 1996( 3 SCC 709 and State of Bombay v. Narothamdas
Jethabai and Anr., (1951( SCR 51, relied on.

Southern Pharmaceuticals and Chemicals, Trichur and Ors. v. State of
Kera/a and Ors., AIR (1981) SC 1863, referred to.

H Gallagher v. Lynn, (1937) A.C. 863, referred to.
STATE 1·. BAIDYANATH AYURVED BHAWAN (P) LTD 337

}·
American Jurisprudence Volume 30, referred to. A
2.5. An Ayurvedic medicinal preparation containing alcohol is
capable of being used as an alcoholic beverage, just as an industrial alcohol
is capable of being diverted to human consumption. The Central laws cover
the manufacture of industrial alcohol, however, its diversion can be
regulated by State laws enacted with reference to Entries 6 and 8 of List- B
II. Similarly, duty on manufacture of medicinal preparations containing
alcohol would fall under the said 1955 Act, however, use and possession
~
thereof will fall under the State law, like the 1915 Act. Similarly,
manufacture for sale of a substance containing alcohol as a drug would
stand covered by the 1940 Act, however, its use and possession as an
alcoholic beverage would fall under the State law. Licensing and regulation
c
of an activity like use/misuse 3f medicine is an enormous activity involving
heavy expenditure. Hence, it is open to the State Government to delegate
some of its powers to the Board of Revenue to prescribe forms of license,
license fees, regulation of retail sales etc. The object of the impugned
notifications and communications dated 3.8.1988 was to license and D
regulate on payment of fees the activity of use (including consumption)
and possession of such preparations containing alcohol as beverages and,

" .,,-
therefore, the State as well as the Board was competent to issue the
impugned notifications/ communications and they fall within the ambit of
sections 5, 19(4), 38, 39 and 90 of the 1915 Act. Therefore, the High Court
erred in holding that the impugned notifications/ communications had
E
encroached upon the field occupied by the 1940 Act and the 1955 Act and
the Rules framed thereunder. (355-E-H; 356-A-B[

2.6. The Drugs Act, 1940 regulates import, manufacture, distribution
and sale of drugs. On reading its provisions it is clear that as long as p
Ayurvedic or Unani drug is used as a drug for diagnosis/treatment/
mitigation or prevention of diseases the activity falls within the ambit of
the said Act. Howev~r, the Drugs Act, 1940 like Medicinal Act, 1955 does
not deal with diversion of drugs to human consumption as alcoholic
beverages which subject is dealt with by the Bihar Act, 1915, which
regulates such use, possession and consumption by issuance of license on G
payment of fees. Hence, the State and the Board were competent to issue
the impugned notifications. [356-H; 357-A-B[

3. The State was competent to enact a law in respect of use and
possession of Ayurvedic preparations containing alcohol as alcoholic H
.
~·

338 SUPREME COURT REPORTS [2005] I S.C.R.

A beverages. As a part of regulation and control of such activity, the State
was entitled to call upon the manufacturers to obtain a license on payment
of fees. The State has to incur expenses incidental to regulation and control
of such activities. Hence, the fee leviable and payable by the manufacturers
under the impugned notification is in the nature of regulatory fee for which
B quid pro quo is not necessary. Furthermore, the rate of fee was found to
be reasonable and proper. Further, the fees levied under the notifications
being regulatory in nature, there is no violation of freedom of inter state
trade and commerce under Article 301 of the Constitution.
1357-F-H; 358-E) "

C Vam Organic Chemicals Ltd and Anr. v. State of U.P. and Ors., )1997)
2 SCC 715; State of U.P. and Ors. v. Sitapur Packing Wood Suppliers and
Ors., [2002) 4 SCC 566 and State of Karnataka and Anr. v. Mis Hansa
Corporation, (1980) 4 SCC 697, relied on.

4. While Article 14 forbids class legislation it does not forbid
D reasonable classification for the purposes of legislation. The legislature is
free to recognize degrees of harm and may confine its restrictions to those
cases where the need is deemed to be the clearest. It is also permissible
for reform to take one step at a time. In the instant case, an experiment is
tried, on trial basis, to license and regulate Ayurvedic medicines containing
alcohol in the first instance. Hence, there is no violation of Article 14 of
E the Constitution. (359-A, B-CI

State a/Gujarat and Anr. v. Shri Ambika Mills Ltd, Ahmedabad and Anr.,
(1974) 4 SCC 656 and Municipal Corporation of the City of Ahmedabad and
Ors. v. Jan Mohammed Usmanbhai and Anr., [1986) 3 SCC 20, relied on.

F 5. With reference to Entry 8 read with Entry 6 of List-II, the Bihar
Legislature was competent to enact the 1915 Act as amended, it cannot
be said that section 2(l2a) of the Bihar Act, 1915 constituted colourable
exercise of power. (359-C-D)

6. The State is directed to fix a period within which manufacturers
G will apply for licence on payment of fees (including arrears) in terms of
the Notifications/Communications No.2/23-3-8811, 2/23-3-88/2, 2/23-3-88/
3, all dated 3rd August, during which they will not be prosecuted.
)359-D-E)

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1543-1547 of
H 1999.
STATE r.BAIDYANATHAYURVEDBHAWAN(PJLTD. [KAPADIA,J.] 339
From the Judgment and Order dated 23.10.89 of the Patna High Court A
in C. W.J.C. Nos. 7865, 7191, 7219, 8294 and 7864 of 1998.

Dinesh Dwivedi, Kumar Rajesh Singh, Rajnish Prasad for B.B. Singh,
for the Appellants.

V.A. Mohta, A.K. Sanghi, Neelkanth Nayak, Ms. Gauri Gupta for the B
Respondent Nos. 2 and 4.

Vivek Sood for R.P. Wadhwani for the Respondent No. I.

The Judgment of the Court was delivered by

KAPADIA, J. The main question in these appeals by grant of special
c
leave relates to the legislative competence of the State Legislature in redefining
the word "intoxicant" in section 2(12a) of the Bihar Excise Act, 1915
(hereinafter referred to for the sake of brevity as "the Bihar Act, 1915") by
including therein "medicinal and toilet preparations" containing alcohol as
defined under the Medicinal & Toilet Preparations (Excise Duties) Act, 1955, D
by Bihar Amending Act No.6 of 1985.

Some of the manufacturers of Ayurvedic medicinal preparations
containing alcohol like Mritsanjivani Sura and Mritsanjivani Sudha, challenged
the validity and constitutionality of section 2(12a)(iv) of the Bihar Act, 1915 E
(as amended), as also the power of the State Government and the Board of
Revenue to license and regulate the use and possession of the aforestated
preparations vide notifications/communications no.2/23-3-8811, 2/23-3-88/2,
and 2/23-3-88/3 all dated 3rd August, 1988.

The main ground of challenge before the High Court was that the State F
Legislature had no competence to levy duty on the manufacture of medicinal
and toilet preparations containing alcohol under the Bihar Act, 1915 after
enactment of the Medicinal & Toilet Preparations (Excise Duties) Act, 1955
(hereinafter referred to for the sake of brevity as "the Medicinal Act, 1955"),
which Act is relatable to Entry 84 List-I of the Seventh Schedule to the
Constitution and consequently, the State Government and the Board of G
Revenue had no authority to license and regulate manufacture of such
preparations. Reliance was also placed on the provisions of the Drugs &
Cosmetics Act, 1940 (hereinafter referred to for the sake of brevity as "the
Drugs Act, 1940") enacted to regulate import, manufacture, distribution and
sale of drugs. It was the case of the manufacturers that the Bihar Act, 1915, H
340 SUPREME COURT REPORTS 12005] I S.C.R.

A as amended, was repugnant to the provisions of the Drugs Act, 1940. In
short, according to the manufacturers. the entire field stood occupied by the
Central enactments and, therefore the Bihar Act, 1915, as amended, was
repugnant to the Drugs Act, 1940 as well as the Medicinal Act 1955.

On consideration of various provisions of the Constitution as well as
B the scheme of the Bihar Act, 1915, the High Court came to the conclusion
that the State Legislature was wrong in including "medicinal preparation"
within the meaning of the word "intoxicant" under section 2(12a) of the
Bihar Act, 1915, by amending Act No.6 of 1985 as the said item has been
set apart by the Constitution for Parliamentary legislation; that this exercise
C by the State Legislature amounted to colourable exercise of the power, which
could have been avoided; that the medicinal and toilet preparations are
subjected to taxes and duties under the Medicinal Act, 1955 and, therefore,
these very products cannot be subjected to double taxation, one by the Central
Government under the Medicinal Act,· 1955 and other under the Bihar Act,
1915. According to the High Court, the levy of fees under the impugned
D notifications, under the licensing procedure, was in substance an excise duty,
which violated Article 30 I of the Constitution, which guarantees free trade,
commerce and intercourse throughout the territory of India. It was further
held, that, the State had failed to show any intelligible differentia with a clear
cut nexus with the objects sought to be served for excluding Unani medicines
E from the operation of the impugned notifications and consequently, the High
Court came to the conclusion that the impugned notifications were
discriminatory and violative of Article 14 of the Constitution. Consequently,
the High Court held, that, the impugned notifications were issued without
authority of law and they suffered from arbitrariness and discrimination.
Accordingly, the impugned notifications/communications were set aside as
F unconstitutional, illegal, unreasonable and arbitrary. Hence, these civil appeals.

Shri Dinesh Dwivedi, learned senior counsel appearing on behalf of the
State inter alia submitted that the State Legislature possessed the exclusive
power to enact a law with respect to Entry 8 read with Entry 6 of List-II to
the Seventh Schedule of the Constitution, which entries in no manner impinged
G upon Entry 84 or any other entry in List-I. Learned senior counsel submitted
that whenever the question of legislative competence is raised, the matter has
to be examined applying the doctrine of pith and substance, as repeatedly
stated by this Court. Learned senior counsel submitted that incidental trenching
upon the field reserved for the Union cannot be characterized as travelling
H beyond the assigned field. He submitted that the Amending Act No.6 of 1985
STATE 1·. BAIDYANATH AYURVEDBHAWAN (P)LTD. [KAPADIA,J.] 341
.,. by which medicinal and toilet preparation containing alcohol is brought within A
section 2(12a) of the Bihar Act, 1915, did not impinge upon the Medicinal
Act, 1955 nor upon the Drugs Act, 1940, because by the said Amending Act
No.6 of 1985, the State Legislature has sought to license· and regulate the use,
possession and consumption of medicinal preparation within the State as
alcoholic beverage. Learned senior counsel further submitted that under the
impugned notifications, the State as well as the Board of Revenue is seeking
B
to regulate and control the use of Ayurvedic preparations containing alcohol
for which license is required to be obtained by the manufacturers on payment
... offees and consequently, such a fee is regulatory in nature and cannot violate
Article 301 of the Constitution. Learned senior counsel further submitted that
the State is entitled to proceed step by step; that in the inception, the State c
has attempted to regulate and control the use of medicinal preparation as
alcoholic beverage and as a first step, the State has attempted to cover
Ayurvedic medicines. Hence, it is a case of "under classification" and,
therefore, there is no violation of Article 14 of the Constitution, as :tlleged.
Learned senior counsel submitted that the regulatory fees do not attract the
principle of quid pro quo and consequently, such fee is not hit by Article 301 D
of the Constitution.

Our attention was drawn to notification nos.2/23-3-88/1dated3.8.1988,
, "I'
which refers to levy of license fee for vend of medicinal preparation in
wholesale @ Rs. 3000 and for retail sale @ Rs.1000, and that for retail sale
of medicinal preparation containing alcohol prepared by distillation, the fee
E
of Rs.1000 is made payable in advance. It was urged on behalf of the
manufacturers that the said impugned notification seeks to levy license fee
for all types of medicinal preparations with or without alcohol and
consequently, the impugned notification impinges on the field occupied by
the Medicinal Act, 1955 referable to Entry 84 List-I. On instructions, Shri F
Dinesh Dwivedi, learned senior advocate for the State stated before us that
~
the fees shall be charged and recovered for vend of medicinal preparations
containing alcohol and that no fees shall be levied, charged and recovered for
vend of medicinal preparations which do not contain alcohol. This clarification
shall form part of our judgment.

l
.
Shri V.A. Mohta, learned counsel for respondent no.2 herein submitted
G

that the amending Act No.6 of 1985 insofar as it includes medicinal and toilet
~ preparations containing alcohol into section 2(12a) of the Bihar Act, 1915 is
· beyond the legislative competence of the Bihar Legislature. Learned senior
counsel submitted that by virtue of the enactment of the Medicinal Act, 1955
H
342 SUPREME COURT REPORTS [2005] 1 S.C.R.

A and the Drugs Act, 1940, both being Central laws, the State Legislature is
denuded of its powers to license and regulate the manufacture of Ayurvedic
medicinal preparations and drugs. Learned counsel submitted that fees charged
under the impugned notifications, in substance, amounted to tax. He submitted
that duty or tax could not be imposed by the State as the field was covered
by the Medicinal Act, 1955 relatable to Entry 84 of List-I of the Seventh
B Schedule to the Constitution. Learned counsel laid stress on clauses (I) (2)
and (3) of Article 246 and submitted that the power of the State Legislature
to make a law with reference to matters in List-II vide Article 246(3) is
_,,
subject to Parliament's powerunder Article 246(1) and Article 246(2). Learned
counsel contended that once the Parliament enacted the Medicinal Act, 1955
c and included therein the power in the Central Government to license and
.=
regulate manufacture of medicinal and toilet preparations, the Parliament
must bt: deemed to have expressed its intention to occupy the entire field of
Entry 84 List-I. If so, the State Legislature has no power to make any law
with respect to manufacture of medicinal and toilet preparations after coming
into force of the said 1955 Act. Learned counsel further submitted that the
D entire exercise of bringing in medicinal and toilet preparations within the
ambit of section 2(12a) of the said 1915 Act was to change the source of
power. He submitted that after enactment of the 1955 Act, referable to Entry
84 List-I, the State Legislature was denuded of its legislative power to enact
a law regulating preparation and manufacture of medicinal preparatiou and
...
E by bringing medicinal and toilet preparation within section 2(12a), the State
Legislature is trying to usurp the power of the Parliament to tax the
manufacture of medicinal and toilet preparations, referable to Entry 84 List-
I. Hence, it is a case of colourable exercise of power by the State Legislature,
which is against the scheme of the Constitution. The next submission of Shri
Mohta was that State law and impugned notifications are violative of Article
F 14 insofar as they do not regulate and control Unani drugs; that no reasons
have been given for regulating only Ayurvedic medicinal preparation and not 'Ir-
Unani drugs and that even after amending the said 1915 Act, several classes
of other medicines remain outside the regulatory provisions of the 1915 Act.
Learned senior counsel submitted that by not regulating Unani medicines, the
G Act and the notifications have brought about an invidious distinction which
is a negation of the equality clause in Article 14. Learned senior counsel next
submitted that in the absence of quid pro quo the fees imposed on medicinal
.
preparations under the impugned notifications constituted duty or tax and
"f
consequently, violated Article 30 I of the Constitution. For the aforestated
reasons, no interference is called for in these civil appeals.
H
STATE 1·. BAIDYANATH AYURVED BHAWAN (P)LTD. [KAPADIA, J.] 343
The scheme of the Bihar Act as reflected in the pr€!amble is that it is A
an Act to consolidate and amend the law relating to import, export, transport,
manufacture, sale and possession of intoxicating liquor and all intoxicants in
the State of Bihar. Section 2(6) defines "excisable article" to mean alcoholic
liquor for human consumption or any intoxicating drug. Section 2(6·a) defines
"excise duty" to mean such excise duty as mentioned in Entry 51 of List-II.
Section 2(10) defines the word "export" to mean to take out of the State of
B
Bihar otherwise than across the customs frontier as defined by the Central
Government. Section 2(12a) defines the word "intoxicant" to mean any liquor
, .. "' or any substance from which liquor is distilled or intoxicating drug or medicinal
preparation as defined under Medicinal Act, 1955. Section 2(13) defines
"intoxicating drugs" to mean charas, bhang, ganja and any other intoxicating c
or narcotic substance which the State Government may by notification declare
to be an intoxicating drug. Section 2(14) defines the "liquor" to include all
liquids containing alcohol and any other substance which the State Government
may by notification declare to be liquor. Section 2(15) defines the word
"manufacture" to include every process by which any intoxicant is produced
or prepared and every process for rectification, blending or colouring. In D
other words, the word "manufacture" is defined to mean such transformation
that brings about a new and different article with a distinctive name and
..., character for use. Section 2( 19) defines the word "spirit" to mean any liquor
containing alcohol obtained by the distillation. Under section 5, the Board of
Revenue is empowered to declare by issuing notification the limits of a retail E
sale of any intoxicant. Chapter III deals with import, export and transport of
intoxicants. Chapter IV deals with manufacture, possession and sale of
intoxicants. Under section 13(a), no intoxicant shall be manufactured except
under the authority and subject to the terms and the conditions of the license
granted by the Collector. Section 18 provides inter alia that no person shall
possess any intoxicant which has not been obtained from a licensed vendor. F
Under section 19( 1), no person not being licensed to manufacture, cultivate,
collect or sell any intoxicant shall possess any intoxicant in excess of such
quantity as the Board has, under section 5, declared to be a limit of a retail
sale. Under section 19(4), the State Government may by notification prohibit
possession, consumption or both of intoxicants by any person or class of G
persons subject to such ~xceptions, if any, as may be specified in the
notification. Under section 20, no intoxicant can be manufactured or produced
'}
from an intoxicating drug and sold except under the authority and subject to
license granted in that behalf by the Collector. Section 22 deals with grant of
exclusive privilege of manufacture and sale of country· liquor or intoxicating
drugs or any other intoxicant. In other words, the State can levy duty in the H

-
344 SUPREME COURT REPORTS [2005) I S.C.R.

A form of a payment for grant of exclusive privilege in respect of country
liquor or intoxicating drugs or any other intoxicants under section 22 of the
Act. Under section 27, the State is empowered to impose excise duty on any
excisable article imported into the State or on any excisable article exported
out of the State or on any excisable article transported within the State or on
B any excisable article manufactured under a license granted under section 13
of the Act or on any excisable article manufactured in any distillery or brewery
licensed under the Act. Under section 30 of the Act, the Collector is required
to prepare a List indicating licenses proposed to be granted for retail sale of
spirit for consumption during the next settlement period. Under· section 38 of
the Act, every license, permit or pass granted under the Act shall be granted
C on payment of fees and subject to such restrictions and conditions, as may
be prescribed by the Board. The form of license shall be issued in such form
and contain such particulars as the Board may direct. The license/permit or
pass shall be granted for such period, as may be prescribed by rule made by
the State Government under section 89( e). Section 56 prescribes penalty for
consumption of any intoxicant as defined under section 2(12a), in any shop
D belonging to a chemist, druggist or keeper of a dispensary. Section 58
prescribes penalty for importation, exportation, transportation, manufacture
or sale of any intoxicant by one person on account of any other. Section 66
refers to liability for intoxication. Section 89 refers to the power of the State
Government to make rules to carry out the object of the Bihar Act. Section
E 89(2) empowers the State Government to make rules for regulating the import,
export or transport of any intoxicant. It also empowers the State Government
under section 89(2)(f) to make rules prohibiting grant of licenses for retail
sale of any intoxicant, at any place or within any local area. Section 90
empowers the Board of Revenue to make rules to regulate the manufacture,
supply or storage of any intoxicant. Under section 90(7), the Board is
F empowered to make rules prescribing fees in respect of any privilege granted
under section 22 or in respect of issuance of any license, permit or pass
granted under the Act. Under section 90(9), the Board is empowered to make
rules prescribing the restrictions under which license or permit may be granted,
prohibiting the admixture with any intoxicant. It also empowers the Board of
G Revenue to prohibit the quantity of liquor by a licensed manufacturer in the
preparation of the intoxicants. It also empowers the Board to regulate the
transfer of license on payment of fees. Similarly, under section 90 of the
Bihar Act, 1915, the Board has framed Rules, known as the Bihar Excise
Rules, 1919. These rules refer to blending, licensing of distilleries, licenses
given to warehouses, blending of potable foreign liquors, licensing of
H breweries, manufacturing of Indian medicinal liquor etc.
·-.i.
)

STATE v. BAIDYANATHAYURVEDBHAWAN(P)LTD. [KAPADIA,J.) 345

On reading the scheme of the Bihar Act, 1915 as amended, it is clear A
that the Act seeks to license and regulate use (including consumption) and
possession of medicinal preparations containing alcohol as alcoholic beverages.
The said 1915 Act, as amended, takes over from where the 1955 Act or 1940
Act ends.

However, it was suggested that the provisions of the Bihar Act are in B
conflict with the provisions of Medicinal Act, 1955, hence, we may examine
its provisions.

The legislative history of the Medicinal Act, 1955 is well known. Under
Entry 40 List-II of the Seventh Schedule to the Government of India Act, C
1935, medicinal and toilet preparations containing alcohol were subjected to
provincial excise duties. Under the Constitution, the entry relating to excise
duty on medicinal and toilet preparations containing alcohol was transferred
to Union List. Parliament accordingly enacted the Medicinal Act, 1955 to
provide for the levy and collection of duties of excise on medicinal and toilet
preparations containing alcohol. The said Act, 1955 is relatable to Entry 84 D
List-I of the Seventh Schedule to the Constitution, which reads as under:

"Duties of excise on tobacco and other goods manufactured or
produced in India except - ·
(a) alcoholic liquors for human consumption;
E
(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 this entry."

The scheme of the Central Act is, therefore, to provide for the levy and p
collection of duties of excise on medicinal and toilet preparations containing
alcohol, opium or any other narcotic drugs. Section 2 is the definition section
and the expression "dutiable goods" is defined in section 2(c) to mean
medicinal and toilet preparations as specified in the Schedule. The expression
"medicinal preparation" is defined in section 2(g) including all drugs which
are a prescription made for internal or external use of human beings. Section G
3 is the charging section, which levies excise duties on all dutiable goods
)
manufactured in India. It also lays down the mode of collection of said
duties. Section 6 prohibits any person from engaging in the production or
manufacture of any dutiable goods, without authority and without license
granted in the Act. Section 19 empowers the Central Government to make H
346 SUPREME COURT REPORTS [2005] I S.C.R.

A rules to carry out the purposes of the Act. Under section 19(1), the Central
Government has framed the Central Rules which deal with manufacture and
production of medicinal preparations, with the ultimate object of providing •
a machinery for collection of duty on the preparations. Rule 18 of the Rules
provides that the rectified spirit shall be supplied to a manufacturer from a
B distillery of the State. Rule 21 provides that rectified spirit shall be issued for
manufacture of medicinal preparations containing alcohol. Rule 33 provides
for taking of sample of the manufactured product for analysis to determine
the strength of the alcohol. These rules are intended to carry out the object
of the Medicinal Act, 1955 i.e. to levy and collect duties of excise on medicinal
and toilet preparations containing alcohol.
c On reading the scheme of the Medicinal Act, 1955, referable to Entry
84 of List-I, it is clear that the charging section 3 of the said 1955 Act seeks
to levy a duty of excise on medicinal preparations containing alcohol and not
on its use and possession as alcoholic beverage, which is dealt with by the
said 1915 Act, referable to Entry 8 read with Entry 6 of List-II. Hence, the
D two Acts operate in different fields. The said 1915 Act regulates use,
possession, transport, import and export of intoxicants. It regulates use and
possession of medicinal and toilet preparation as akoholic beverage. In
Mritsanjivani Sura, level of alcohol, though self generated, is so high that it
can be consumed as alcoholic beverage. The subject matter of the impugned
E State law, therefore, cannot conflict with the 1955 Act. The power of the
State to regulate and control the use and possession of medicinal preparation
containing alcohol as alcoholic beverage falls under Entry 6 (Public Health)
as well as Entry 8 (Intoxicating Liquor) of List-II in the Seventh Schedule to
the Constitution, whereas the 1955 Act is referable to Entry 84 of List-I
which deals with taxation. The object of the impugned notifications and
F communications dated 3.8.1988 is to license and regulate on payment of fees
the activity of use (including consumption) and possession of such preparations
containing alcohol as beverages and, therefore, they fall within the ambit of
sections 5, 19(4), 38, 39 and section 90 of the 1915 Act.

It was urged on behalf of the manufacturers that the said 1915 Act (as
G amended) is in conflict with the provisions of the Drugs Act, 1940. Hence,
we are required to examine the scheme of the Drugs Act, 1940. The said Act,
1940 is enacted to regulate import, manufacture, distribution and sale of
drugs and cosmetics. The Act came to be enacted on I 0.4.1940, pursuant to
a resolution passed by the Legislatures of all the provinces in terms of section
H 103 of the Government of India Act, 1935. Under section 2, it has been stated
STATE 1•.BAIDYANATHAYURVEDBHAWAN(P)LTD. [KAPADIA,!.] 347
that the provisions of the Drugs Act shall be in addition to and not in derogation A
of the Dangerous Drugs Act, 1930 and any other law for the time being in
force. Section 3(a) defines "Ayurvedic or Unani drug" to include all medicines
intended for diagnosis, treatment, mitigation or prevention of diseases
manufactured exclusively in accordance with the formulae described in
authoritative books consisting Ayurvedic and Unani system of medicines, B
specified in the First Schedule. Section 3(b) defines "a drug" to include all
medicines and all substances intended to be used for diagnosis, treatment,
mitigation or prevention of any disease. Chapter-IJI deals with import of
> drugs. Chapter IV A makes provisions relating to Ayurvedic and Unani drugs.
Sections 33E, 33EE and 33EEA refer to Ayurvedic and Unani drugs which
shall be deemed to be misbranded, adulterated and spurious respectively. C
Under section 33EEB, no person shall manufacture for sale or distribution
any Ayurvedic or Unani drugs except in accordance with the prescribed
standards. Section 33EEC prohibits manufacture and sale of certain Ayurvedic
and Unani drugs. Section 33-I imposes penalty for manufacture, sale or
distribution of any Ayurvedic or Unani drug in contravention of Chapter
IV A. Rule 153 of the Drugs & Cosmetics Rules, 1945 deals with application D
for license to manufacture for sale any Ayurvedic or Unani drugs. Rule 158
provides for conditions of license for manufacture for sale of such drugs. In
the Rules, so far as Ayurvedic and Unani drugs are concerned, there is no
provision for licensing of use and possession of Ayurvedic drugs as under the
1915 Act. The Rules under the Drugs Act regulate only manufacture of E
Ayurvedic drugs for sale and not for consumption, use or possession.

On reading the provisions of the Drugs Act with the Rules, we find that
the Act is confined to use of Ayurvedic medicines containing alcohol for
diagnosis, treatment, mitigation or prevention of disease and not to its use as
alcoholic beverages. Under the rules, the manufacture of Ayurvedic drug for F
sale alone is regulated. There is no provision in the Rules regulating the use
of such drugs as alcoholic beverages. The object of the Drugs Act is to
maintain the quality of drugs as drugs. Its use as any other commodity in the
hands of the consumer is not regulated. Hence, the Drugs Act is relatable to
Entry 19 of List-III, which deals with drugs and poisons, subject to Entry 59 G
of List-I regarding opium. Lastly, the said Act regulates the manufacture of
drug for sale and distribution as a drug. If a druggist sells a drug across the
counter, he cannot be faulted. His license cannot be cancelled. He has not
converted the drug into an alcoholic beverage, which activity can be resorted
to by a consumer. The consumer can misuse or abuse the drug after he buys
the same from chemist. Such an activity falls within the provisions of the H
348 SUPREME COURT REPORTS [2005] I S.C.R.

A Bihar Act, 1915, as amended and not under the Drugs Act, 1940.
In order to appreciate the contentions advanced before us on both sides,
it is necessary to reproduce the relevant entries in the Lists of the Seventh
Schedule to the Constitution.

B "list-I : Union list

"Entry 84: Duties of excise on tobacco and other goods manufactured
or produced in India except -
(a) alcoholic liquors for human consumption;
c (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 this entry.

list-II : State list
D
Entry 6. Public health and sanitation; hospitals and dispensaries.

Entry 8. Intoxicating liquors, that is to say, the production,
manufacture, possession, transport, purchase and sale of intoxicating
liquors.
E
list-Ill : Concurrent list

Entry 19. Drugs and poisons, subject to the provisions of entry 59 of
List-I with respect to opium."

F A question of constitutional importance arises in these appeals, namely,
whether the State Legislature was competent to include medicinal and toilet
preparations containing alcohol governed by the provisions of Medicinal Act,
1955 into the definition of the word "intoxicant" in section 2 (12a) of the
Bihar Act, 1915, as amended by Act No.6 of 1985.

G Part XI of the Constitution deals with relations between the Union and
the States. Chapter-I in this part bears the heading "Legislative Relations:
Distribution of Legislative Powers." Clause (1) of Article 245 declares that
"subject to the provisions of this Constitution, Parliament may make laws for
the whole or any part of the territory of India, and the Legislature of a State
may make laws for the whole or any part of the State." Clause (I) of Article
H
STATE 1'. BAIDYANATH AYURVED BHAWAN (P)LTD. [KAPADIA, J.] 349
246 declares that "notwithstanding anything contained in Clauses (2) and (3), A
Parliament has exclusive power to make laws with respect to any of the
matters enumerated in List-I in the Seventh Schedule (in this Constitution
referred to as the 'Union List'). Clause (2) of Article 246 declares that
"notwithstanding anything in Clause (3), Parliament and, subject to Clause
(I), the Legislature of any State also have power to make laws with respect
to any of the matters enumerated in List-Ill in the Seventh Schedule (in this B
Constitution referred to as the 'Concurrent List')". Clause (3) of Article 246
then declares that "subject to Clauses (I) and (2), the Ltgis!ature of any State
has exclusive power to make laws for such State or any part thereof with
respect to any of the matters enumerated in List-II in the Seventh Schedule
(in this Constitution referred to as the State List)." Clause (4) says that C
"Parliament has power to make laws with respect to any matter for any part
of the territory of India not included in a State, notwithstanding that such
matter is a matter enumerated in the State List''. Article 248 vests the residuary
legislative power in the Union. Article 249 empowers the Parliament to
legislate with respect to a matter in the State List in national interest while
Article 250 empowers the Parliament to legislate with respect to any matter D
in the State List if a proclamation of emergency is in operation. Article 251
says that the provisions of Articles 249 and 250 do not restrict the power of
the Legislature to make any law which it is competent to make but if such
law is repugnant to any of the provisions of the law made by the Parliament
under the said Articles, the law made by the Parliament shall prevail so long E
only as the law made by the Parliament continues to have effect. Article 252
empowers the Parliament to legislate for two or more States by their consent.
It also provides for adoption of such legislation by other States. Article 254
declares that if any provision of law made by the Legislature of a State with
respect to matters enumerated in the Concurrent List is inconsistent with the
provisions of any law made by the Parliament, whether made earlier to the F
State enactment or later, the State enactment shall to the extent of repugnancy
be void. If, however, the State enactment is reserved for and receives the
assent of the President, such law will prevail in that State notwithstanding its
repugnancy with a Parliamentary enactment.

In the case of Adhyaksha Mathur Babu 's Sakti Oushadha/aya Dacca
G
(P) Ltd. and Ors. v. Union of India, reported in AIR (1963) SC 622, one of
the questions which arose for determination was whether Mritsanjivani Sura
was medicinal preparation under the said Medicinal & Toilet Preparations
(Excise Duties) Act, 1955. Mritsanjivani Sura and Mritsanjivani Sudha were
mentioned in the Schedule annexed to the Medicinal & Toilet Preparations H
350 SUPREME COURT REPORTS (2005) I S.C.R.

A (Excise Duties) Rules, 1956. Placing reliance on the affidavit of the Chemical
Examiner, this Court found that the aforestated two preparations contained
42 per centum of alcohol. This Court further found that the aforestated
preparations were medicinal preparations, however, they were also capable
of being used as ordinary alcoholic beverages. At this stage, it may be
B mentioned that after 1960, the aforestated preparations have been omitted
from the Schedule. On consideration of the entire matter this Court came to
the conclusion that since the aforestated two preparations were medicinal
preparations under the said Medicinal Act, 1955, the Central Government
was entitled to impose excise duty on their manufacture. The important point
to be noted is that the said judgment did not deal with use and possession of
C the aforestated two substances. As stated above, both the substances were
capable of being used as alcoholic beverages. The only question before this
Court was with regard to levy of excise duty on these two substances under
the said 1955 Act. The said judgment did not deal with the question of
competence of the State Legislature to enact the law regulating use and
possession of these two substances as alcoholic beverages. Suffice it to state,
D that, these two substances were not only medicinal preparations, they were
.also capable of being used as alcoholic beverages. Therefore, regulation of
distribution and supply of the aforestated substances was not in issue in the
said case.

E In the case of State of UP. and Anr. v. Synthetics & Chemicals Ltd.
and Anr., reported in [1991) 4 SCC 139, this Court has held that the power
of regulation and control is separate and distinct from the power of taxation.
Legislative exercise of regulation or control referable to Entry 8 of List-II is
distinct and different from the taxing power attributable to Entry 84 in List-
i. The legislative field for levying tax by the Central Government is set out
F in Entries 82 to 91 of List-I whereas the legislative field for levying tax by
the State is set out in Entries 45 to 63 in List-II of the Seventh Schedule.
There is no overlapping. Fields are clearly demarcated. The general entry for
regulating distribution and supply is different from exercise of taxing power.
The difference does not remotely touch each other. Entry 8 of List-II is a
G general entry for regulating the distribution and supply of substances. The
said entry stands on its own. It is not limited or restricted by any entry in
List-I or in List-III.

In the case of The Hyderabad Chemical & Pharmaceutical Works Ltd.
v. State of Andhra Pradesh and Anr., reported in AIR (1964) SC 1870, the
H question of medicinal and toilet preparations again came up for consideration
STATE 1•.BAIDYANATHAYURVEDBHAWAN(P)LTD [KAPADIA,J.] 351
before this Court. Prior to the enactment of Medicinal & Toilet Preparations A
(Excise Duties) Act, 1955 which came into effect from 1.4.1957, the appellant
used to manufacture medicines containing alcohol under the license granted
under the Hyderabad Abkari Act. After enactment of the Medicinal Act,
1955, the appellant stood covered by that Act. The State Government however
demanded duty for manufacture of medicines by the appellant under the
Hyderabad Abkari Act. The appellant, therefore, co~tended that the State B
Government was not entitled to charge under Hyderabad Abkari Act as the
said Act stood repealed after the Central Government had ~11acted the
Medicinal & Toilet Preparations (Excise Duties) Act 1955. The question
which arose before this Court was whether after coming into force of the
Medicinal & Toilet Preparations (Excise Duties) Act, the rules framed under C
the Hyderabad Abkari Act can be said to survive. It was held that before the
Constitution came into force the Hyderabad Abkari Act was a general Act.
However, under the Constitution, the Medicinal & Toilet Preparations Act
came under Entry 84 List-I which provides for duty of excise on medicinal
and toilet preparations containing alcohol and therefore no charge could be
levied on the manufacture of medicinal preparation except by the Central D
Government in the shape of duty in Entry 84 List-I. It was further held that
as long as the Centre did not enact the Medicinal & Toilet Preparations Act,
1955, the State was entitled to charge duty under Article 277 of the
Constitution. However, with the coming into force of Medicinal & Toilet
Preparations Act, on and from 1.4.1957, the State could not levy any charge E
or duty on manufacture of medicinal preparation containing alcohol. This
judgment on which heavy reliance is placed by the respondent Nos. I and 2
has no application to the present case. In the present case, we are concerned
with use and possession of substances containing alcohol capable of being
used as alcoholic beverages. They may be medicinal preparations for the
purposes of excise duty, however, these substances are also capable of being F
-t used as alcoholic beverages and, therefore, the question which arises for
decision before this Court is whether the State Legislature was entitled to
regulate the use and possession of these substances which are capable of
being used as alcoholic beverages under the Bihar Act, I915 as amended. In
our view, the said Bihar Act is relatable to Entry 8 read with Entry 6 of List- G
II in the Seventh Schedule to the Constitution. As stated above section 2
(12a) of the Bihar Act defines the word 'intoxicant' to mean liquor or any
.,- substance from which liquor may be distilled or intoxicating drug or medicinal
preparation as defined under the Medicinal & Toilet Preparations Act, 1955.
Under the said Act, liquor is also defined vide section 2(14) to include all
liquids consisting or containing alcohol such as wine, spirit, tari and any H
352 SUPREME COURT REPORTS [2005] I S.C.R.

A other substance which the State may by notification declare to be liquor.
Hence, the 1915 Act covers use and possession of medicinal preparations
containing alcohol, which subject matter is not covered by the 1955 Act.

In the case of State of Bihar and Ors. v. Industrial Corporation (P) ltd
and Ors., reported in (2003] 11 SCC 465, the respondents companies were
B engaged in the manufacture of rectified spirit from molasses allotted to them
by Controller in terms of Bihar Molasses (Control) Act, I 947. The companies
were granted licenses under the Bihar Act 1915. While carrying on such
manufacture of spirit, some loss had occurred allegedly in the quantity of
molasses supplied by the controller. The Auditor General in his report found
C loss of revenue by reasons of aforestated loss in the quantity of molasses
supplied by the controller. The department issued notices alleging breach of
licenses conditions. The companies were threatened with penal duty on the
ground that they had diverted molasses towards manufacturing liquor fit for
human consumption. The companies filed writ petitions before the Patna
High Court. The writ petitions were allowed. The levy was set aside. The
D State came to this Court by filing special leave petition. The impugned levy
was sought to be justified on the ground that the State Legislature was
competent to levy duty on the outcome of the molasses. Following the
judgment of this Court in Synthetics and Chemicals Ltd. v. State of U.P.,
reported in [1990] l SCC 109, this Court held that the State Legislature was
E not entitled to levy excise duty on rectified spirit or industrial alcohol useable
for industrial purposes. However, it was clarified that if any rectified spirit
was diverted or used for manufacturing potable liquors, the State was
empowered to impose duty if it found that rectified spirit was being removed
from the distillery for the purposes of manufacturing potable liquor. In coming
to the said conclusion, this Court placed reliance on the definition of the
F word 'intoxicant' under section 2(12a); the word 'liquor' in section 2(14) and
also the word 'spirit' in section 2 (I 9) of the Bihar Act; 1915. On construction
of these three words this Court held that the total effect of the definition
'intoxicant' read with the words 'liquor' and 'spirit' meant that the substance
used for human consumption can be subjected to duty by the State. However,
G duty cannot be imposed by the State on manufacture of industrial alcohol.
In the case of Bihar Distillery and Anr. v. Union of India and Ors.,
reported in [1997] 2 sec 727, a distillery was established. It sold rectified
spirit produced by it. The distillery got its license from the State Government
up to the year 1991-1992 under the Bihar Act. In 1992 the department proposed
H to cancel the license. The distillery objected on the ground that it was
i
STATE'" BAIDYANATHAYURVEDBHAWAN(P)LTD. [KAPADIA,.!] 353
manufacturing rectified spirit which came within the exclusive province of A
t· the Central Government. With this contention the distillery approached this
Court. After noticing the relevant entries in the Seventh Schedule to the
Constitution this Court took the view. that Entry 84 in List-I and Entry 51 in
List-II complemented each other. Both provide for duties of excise. But
while the States are empowered to levy duties of excise on alcoholic liquor B
for human consumption and on opium and narcotics products in the State but
excluding medicinal and toilet preparations containing alcohol, the Union is
empowered to levy excise duty on tobacco and others goods, except alcoholic
liquor for human consumption. This Court further held that Entry 8 of List-
II covers all aspects of intoxicating liquors within the State; it covers
production, manufacture, possession, transport, purchase and sale. Entry 6 C
speaks of public health. It furnishes a ground of prohibiting consumption of
intoxicating liquor. On reading Entries 6, 8 and 51 in List-II, this Court held
that so far as potable alcohols are concerned, they are squarely covered by
Entry 8. They are within the exclusive domain of the State. It was further
held that rectified spirit was an industrial alcohol. The State has no power
whatsoever to legislate in relation to industrial alcohol. However, the Court D
observed that in many cases the rectified spirit was an ingredient for
intoxicating liquor or alcoholic liquor for human consumption. Hence, so
long as alcoholic preparation can be diverted to human consumption, the
States shall have the power to legislate as also to impose taxes on such
diversion. This is also the ratio of the judgment of this Court in the case of E
Varn Organic Chemicals Ltd. and Anr v. State of UP. and Ors., reported in
[19971 2 sec 715.

Applying the test laid down by this Court in the case of Bihar Distille1y
(supra) to the facts of the present case, we hold that Medicinal Act, 1955
levies duty on the manufacture of Ayurvedic medicines containing alcohol. F
However, when the Ayurvedic preparation is diverted to human consumption
the State shall have the power to regulate and control such use which has
been done in the present case by amending Act No.6 of 1985, which is a law
relatable to Entry 8 read with Entry 6 of List-IL

In American Jurisprudence Volume-30, it is stated that in the matter of G
liquor traffic the power of control by the State is an incident of the society's
right to self-protection. It rests upon the right of the State to care for the
health, moral and welfare of the people. This is the very purpose behind
Entry 6 of List-II in the Seventh Schedule of the Constitution. In the case of
Har Shankar and Ors. v. Deputy Excise & Taxation Commissioner and Ors., H
354 SUPREME COURT REPORTS [2005] I S.C.R.

A reported in [ 1975] I SCC 737, this Court observed that the State under its
regulatory powers has a right to prohibit absolutely every form of activity in
relation to intoxicants its manufacture, storage, export, import, transport, sale
and possession. Applying the above tests, it is clear that the Bihar Act is
relatable to Entry 8 read with Entry 6 of List-II in the Seventh Schedule to
the Constitution.
B
In the case of State of Andhra Pradesh and Ors. v. Mcdowell & Co. &
Ors., reported in [1996] 3 SCC 709, this Court held that once the impugned
enactment falls within the four comers of Entry 8 read with Entry 6, no
Central law made with respect to any Entry in List-I or with reference to any
C Entry in List-Ill can affect the validity of such State enactment. The argument
of occupied field in such a case is totally out of place. If a particular matter
is within the exclusive competence of the State Legislature, that is, in List-
11, that represents the prohibited field for the Union. Similarly, if any matter
is within the exclusive competence of the Union, it becomes a prohibited
field for the States. The concept of occupied field is relevant in the case of
D laws made with reference to Entries in List-Ill. The several entries in the
List-III in the Seventh Schedule are mere legislative heads and it is quite
likely that very often they overlap. Wherever such a situation arises, the issue
must be resolved by applying the rule of pith and substance. Whenever, a
piece of legislation is said to be beyond the legislative competence of a State
E Legislature, what one must do is to find out, by applying the rule of pith and
substance, whether that legislation falls within any of the Entries in List-II.
If it does, no further question arises; the attack upon the ground of legislative
competence shall fail. In such a case, Article 246 (3) cannot be employed to
invalidate the legislation on the ground of legislative incompetence of State
Legislature. Once an enactment in pith and substance is relatable to Entry 8
F in List-II, Article 246(3) cannot be brought in to hold that State Legislature
is not competent to enact that law. However, if on the other hand, the State
legislation in question is relatable to an Entry in List-Ill, then, applying the
rule of pith and substance, the legislation would still be valid, subject to the
parliamentary enactment being inconsistent with it, a situation dealt with by
Article 254. Any incidental trenching does not amount to encroaching upon
G the field reserved for Parliament, though the extent of trenching beyond the
competence of the legislating body may be an element in determining whether
th~ legislation is colourable. No such question arises in this case.

As stated above, use/misuse of Ayurvedic preparations as alcoholic
H beverage can become the subject matter of regulation and control by the
STATE v. BAIDYANATH AYURVED BHAWAN (P) LTD [KAPADIA,!.] 355
State. It is the subject of the Bihar Act, 1915. Hence, the State Act is relatable A
to Entry 8 read with Entry 6 of List-II. The State law operates in a different
field vis-a-vis Medicinal Act, 1955 which is relatable to Entry 84 List-I. We
hav~ examined the scheme of the two Acts. Medicinal Act, 1955 levies
excise duty on the manufacture of medicinal and toilet preparations. The said
1955 Act is a taxing statute. Entry 84 List-I is an entry which deals with B
taxing power. On the other hand, Entry 8 read with Entry 6 of List-II refers
to general subject oflegislation. It refers to regulation and control of substances
in public interest. The Act is enacted in public interest to secure good health
for the citizens. Therefore, the two Acts are in different spheres. There is no
trenching even incidentally by the Bihar Rules and the impugned notifications
into the provisions of the Medicinal Act, 1955 read with the Rules. It is well C
settled that even if at all there is any trenching or incidental encroachment
such encroachment will not affect the competence of the Legislature to enact
the law nor will it affect its validity. [See: State of Bombay v. Narothamdas
Jethabai and Anr. reported in [1951] SCR 51]. In the case of Gallagher v.
Lynn, reported in (1937) A.C. 863], the Privy Council held that although the D
impugned Act was in pith and substance an Act to protect the health of the
inhabitants of Northern Ireland and though incidentally it affected trade,
which came in the Union List, the State law was not passed in respect of the
... trade and was therefore not subjected to attack on that ground .

As stated above, an Ayurvedic medicinal preparation containing alcohol E
is capable of being used as an alcoholic beverage, just as an industrial alc~hol
is capable of being diverted to human consumption. It is now well settled by
a catena of decisions that the manufacture of industrial alcohol is covered by
the Central laws, however, its diversion can be regulated by State laws enacted
with reference to Entries 6 & 8 of List-II. Similarly, duty on manufacture of
medicinal preparations containing alcohol would fall under the said 1955 F
Act, however, use and possession thereof will fall under the State law, like
the said 1915 Act. Similarly, manufacture for sale of a substance containing
alcohol as a drug would stand covered by the said 1940 Act, however, its use
and possession as an alcoholic beverage would fall under the State law.
Licensing and regulation of an activity like use/misuse of medicine is an G
enormous activity involving heavy expenditure. Hence, it is open to the State
Government to delegate some of its powers to the Board of Revenue to

• prescribe forms of license, fees, regulation of retail sales etc. In the
circumstances, the State as well as the Board was competent to issue the
impugned notifications/communications under sections 5, 19(4), 38, 39 and
90 of the said 1915 Act (as amended) to license and regulate the use of such H
356 SUPREME COURT REPORTS (2005] I S. C.R.

A preparations as alcoholic beverages. In -the circumstances, we hold, that, the
High Court had erred in holding that the impugned notifications/
communications had encroached upon the filed occupied by the said 1940
Act and the said 1955 Act and the Rules framed thereunder.

Before concluding, we may point out that in the case of Southern
B Pharmaceuticals & Chemicals, Trichur and Ors. v. State of Kera/a and Ors.,
reported in AIR (1981) SC 1863, this Court has taken the view, which we
have taken hereinabove. Jn that case, this Court held, that, by enactment of
Medicinal Act, 1955 by Parliament under Entry 84 List-I of the Seventh
Schedule of the Constitution or by the framing of rules by the Central
C Government thereunder for recovery of excise duty on manufacture of
medicinal and toilet preparations containing alcohol, a State Legislature is
not prevented from making a law under Entry 8 List-II with respect to
intoxicating liquor or a law under Entry 51 List-JI levying excise duties on
alcoholic liquors for human consumption. In that case it was held that the
Abkari Act of Kerala is relatable to the State's power to make a law under
D Entry 8 and Entry 51 List-JI of the Seventh Schedule to the Constitution.
There is a difference between the word "on" and the expression "with respect
to". When we refer to levy on excise duty under Entry 84 List-I, we emphasize
the word "on". On the other hand, when we refer to Entry 8 List-JI, which
is a general entry, relating to "intoxicating liquor", we refer to a wider activity.
E The words "in respect of' or the words "with respect to" used in the aforestated
judgment in the context of Entry 8 List-JI bring out the above difference.
Entry 8 List-II is an entry on general subject unlike Entry 84 List-II which
deals with taxation. Keeping in mind the difference between the two, we hold
that the State law under Entry 8 List-JI covers a wider field of use,
consumption, possession, diversion etc. vis-a-vis Entry 84 List-I, which deals
F with duty on manufacture of medicinal preparation, as such. This difference
is lost sight of by the High Court in the impugned judgment.

As stated above, one of the grounds of attack before the High Court
was that the Board of Revenue as well as the State was not competent to
enact a law as well as the impugned notifications as Ayurvedic preparation
G containing alcohol was a drug as defined under section 3(a) of the Drugs Act,
1940, which was relatable to Entry 19 of List-Ill of the Seventh Schedule to
the Constitution. In this connection it was urged that the impugned notifications
were in conflict with the Drugs Act, 1940. We do not find any merit in this
argument. The Drugs Act, 1940 is to regulate import, manufacture, distribution
H and sale of drugs. Under section 3(a), Ayurvedic or Unani drug is defined to
STATE 1•. BAIDYANATHAYURVEDBHAWAN(P)LTD. [KAPADIA,J.) 357
t include all medicines intended for use in diagnosis/treatment/mitigation or A
prevention of diseases. Chapter IVA of the Drugs Act, 1940, exclusively
deals with provisions relating to Ayurvedic and Unani Drugs. It refers to
making of regulations in respect of manufacture for sale of Ayurvedic and
Unani drugs. On reading the provisions of the Drugs Act, 1940, as analyzed
hereinabove, it is clear that as 'long as Ayurvedic or Unani drug is used as B
a drug for diagnosis/treatment/mitigation or prevention of diseases the activity
falls within the ambit of the said Act. However, the Drugs Act, 1940 like
Medicinal Act, 1955 does not deal with diversion of drugs to human
consumption as alcoholic beverages which subject is dealt with by the Bihar
Act, 1915, which regulates such use, possession and consumption by issuance
of license on payment of fees. Hence, the State and the Board were competent C
to issue the impugned notifications.

The next part of the case relates to question of quid pro quo between
the services rendered by the State and the rate of levy of fee charged. It was
submitted that the vend fee for the grant of license had no connection or co-
relationship with the services rendered by the Government. On this point, the D
High Court held vide itnpugned judgment that there was nothing to show that
the levy was set apart for the performance of some work. The High Court
observed there was nothing to show that the fee had not merged in the public
revenue and therefore the State of Bihar was not entitled to charge any
amount in the form of fees or fixed payment. According to the High Court, E
the State in the garb of fees or fixed payment was trying to impose tax/excise
duty which could not be done as the State was not competent to levy excise
duty on medicinal and toilet preparations which are already subjected to duty
under the provisions of 1955 Act. According to the High Court the same
products cannot be subjected to double taxation. The reasoning of the High
Court is erroneous. As held hereinabove, the State was competent to enact a F
j law in respect of use and possession of Ayurvedic preparations containing
alcohol as alcoholic beverages. As a part of regulation and control of such
activity, the State was entitled to call upon the manufacturers to obtain a
license on payment of fees. The State has to incur expenses incidental to
regulation and control of such activities. Hence, the fee leviable and payable G
by the manufacturers under the impugned notification is in the nature of
regulatory fee for which quid pro quo is not necessary. We also find the rate
of fee to be reasonable.

In the case of Varn Organic Chemicals ltd. and Anr. v. State of U.P.
and Ors., reported in [1997] 2 sec 715, the distinction between regulatory H
358 SUPREME COURT REPORTS (2005) I S. C.R.

A fee and fee for services rendered has been succinctly brought out. It was held
that there is a differe:.ce between regulatory fees and compensatory fees. In
the case of regulatory fees, like license fees, existence of quid pro quo is not
necessary although such fees must not be excessive. Keeping in view the
quantum of nature of work involved in supervising the activities under the
B Bihar Act, we are of the view that the fee mentioned in the impugned
notification is reasonable and proper.

Similarly, in the case of State of UP. and Ors v. Sitapur Packing Wood
Suppliers and Ors., reported in [2002] 4 SCC 566, this Court held that the
question of quid pro quo is necessary when a fee is compensatory, for every
C fee quid pro quo is not necessary. In the case of regulatory fee it is not
necessary to establish the factum of rendering of service. Therefore, there is
no question of regulatory fee being invalidated on the ground that quid pro
quo has not been established.

The next point which arises for determination is whether the fees levied
D under the impugned notifications violated Article 30 I of the Constitution.
We have held that the fees levied under the impugned notifications are
regulatory in nature. In the case of State of Karnataka and Anr. v. Mis.
Hansa Corporation, reported in [1980] 4 SCC 697, this Court has held that
...
if a measure is regulatory in character, it would be immune from challenge
under Article 30 I of the Constitution. In the circumstances, by levy of fees
E under the impugned notifications, there is no violation of freedom of inter
state trade and commerce, as held by the impugned judgment.

As stated above, the impugned notifications have been challenged by
respondent nos. I & 2 on the ground of discrimination. The respondents have
F challenged the impugned notifications on the ground that they seek to regulate
and control use and possession of only Ayurvedic preparations and not Unani
medicinal preparations and consequently the impugned notifications violate
Article 14 of the Constitution. We do not find any merit in these arguments.
In the case of State a/Gujarat and Anr. v. Shri Ambika Mills ltd., Ahmedabad
and Anr., reported in [1974] 4 SCC 656, Mathew, J. speaking for the Court
G pointed out that classification is inherent in legislation. Article 14 does not
require that every regulatory statute should apply to all in the same business:
where size is an index, discriminations between large and small are permissible,
and it is also permissible for reform to take one step at a time. In the case
of Muni~ipal Corporation of the City of Ahmedabad and Ors. v. Jan
H Mohammed Usmanbhai and Anr., reported in [1986] 3 SCC 20, this Court
STATE'" BAIDYANATHAYURVEDBHAWAN{P)LTD. [KAPADiA,J.] 359
held that while Article 14 forbids class legislation it does not forbid reasonable A
classification for the purposes of legislation and that in order to pass the test
of permissible classification two conditions must be fulfilled, namely, the
classification must be founded on an intelligible differentia which distinguishes
persons or class that are grouped together from other left out of the group and
secondly such differentia must have rational relation to the object sought to B
be achieved by the statute in question. It must be borne in mind that the
legislature is free to recognize degrees of harm and may confine its restrictions
to those cases where the need is deemed to be the clearest. In the present .
case, an experiment is tried, on trial basis, to license and regulate Ayurvedic
medicines containing alcohol in the first instance. Hence, there is no violation
of Article 14 of the Constitution. C
Since we have held with reference to Entry 8 read with Entry 6 of List-
IJ that the Bihar Legislature was competent to enact the said 1915 Act as
amended, there is no merit in the contention advanced on behalf of the
manufacturers that section 2(12a) of the Bihar Act, 1915 constituted colourable
exercise of power. D
Before concluding, we may clarify, that, the State will fix a period
within which the manufacturers will apply for license on payment of fees
(including arrears) in terms of the impugned notifications/communications
no.2/23-3-88/1, 2/23-3-88/2, and 2123-3-8813, all dated 3rd August, 1988.
During this period, they will not be prosecuted. However, if the manufacturers E
fail to comply with the impugned notifications/communications within the
stipulated period, then, the State Government, on expiry of such period,
would be entitled to proceed against the manufacturers in accordance with
law.
F
Subject to above, the appeals are allowed and the impugned judgment
·~·
and order of the High Court dated 23.10.1989 passed in CWJC Nos.7865,
7191, 7219, 8294 and 7864 of 1988, is set aside. We uphold the validity of
the Bihar Excise Act, 1915 as well as the validity of the impugned notifications/
communications, all dated 3.8.1988. However, in the facts and circumstances
of the case, there will be no order as to costs. G
N.J. Appeal allowed.