GUJARAT NATIONAL LAW UNIVERSITY

CONSTITUTIONAL LAW – III PROJECT

STATE OF MADHYA PRADESH V. MAHALAXMI FABRIC MILLS LTD. & ORS.

A case analysis with specific reference to the concept of

Colourable Exercise of Power.

Varun Kasthuri
17B170
Batch- 2017-22
 State of Madhya Pradesh v. Mahalaxmi Fabric Mills & Ors.

TABLE OF CONTENTS

I. Acknowledgements ....................................................................... 3

II. Introduction .................................................................................. 4

III. Factual Analysis of the Case..................................................... 6

A. Facts of the case. ...................................................................... 6
B. Issues before the Court ............................................................. 7
C. Contentions of the Parties ........................................................ 7
D. Holding of the Court ................................................................ 9

IV. Conclusion and Analysis ......................................................... 13

 State of Madhya Pradesh v. Mahalaxmi Fabric Mills & Ors.

I. ACKNOWLEDGEMENTS

I would like to express my gratitude towards our constitutional law professor, Dr. Girish R.,
for helping me select a topic in an area of interest, and helping in defining the methodology to
follow for the completion of this project. I would also like to thank Gujarat National Law
University and Prof. Dr. Sanjeevi Shantakumar, our respected Director, for providing us the
necessary infrastructure and resources to undertake the necessary research to complete this
project.
Lastly, I would like to thank my classmates for providing a sense of healthy competition by
their constant encouragement and motivation to do my best and score well!
 State of Madhya Pradesh v. Mahalaxmi Fabric Mills & Ors.

II. INTRODUCTION

In early 1995, the Supreme Court of India was tasked with deciding a dispute which revolved
around the legislative competence of the Central Legislature and that of the State of Madhya
Pradesh. In deciding the vires of Section 9(3) of the Mines and Minerals (Regulation and
Development) Act, 1957 and of a notification passed thereunder, the Court had to examine
specific entries in the Seventh Schedule of the Constitution, to conclusively rule on the validity
of the impugned provision. In doing so, the Court took note of and employed the Doctrine of
Colourable Legislation.

The doctrine of colourable legislation is one that is well recognised by the Supreme Court of
India, both in the context of the modern Constitution1 as well as that of the Government of
India Act, 1935.2 It addresses the situation where the legislature of a particular territorial unit,
be it the Centre or a State, transgresses the powers that are conferred upon it in a covert, indirect
or disguised manner.3 It thereby protects against legislatures lacking the legislative power from
framing their legislation in such a manner that it appears to be within the legislative power.4

This test of legislative competence was not created by the courts in India. In fact, the Supreme
Court has considered principles laid down by Privy Councils in both Canada and Australia in
ultimately bringing this principle into the Indian constitutional framework. In both Union
Colliery Co. of British Columbia v. Bryden5 and Attorney General of Ontario v. Reciprocal
Insurers,6 the Courts laid down the foundation of this doctrine. The application of the principle
was expanded from within a single statute to a number of statutes by the Court in Attorney
General for Alberta v. Attorney General for Canada.7 It is in considering these cases, and
others like W.R. Moran Pty. Ltd. v. Deputy Commissioner of Taxation for N.S.W.8 that the
Supreme Court adopted the principle in the case of K.C. Gajapati Narayan Deo v. Orissa.9

1
State of Bihar v. Kameshwar, AIR 1952 SC 252; Gajapati v. State of Orissa, AIR 1953 SC 375.
2
Megh Raj v. Alla Rakhia, (1942) 46 CWN (F.R.) 61.
3
Federation of Hotel & Restaurant Association of India v. Union of India, 1988 AIR 1291.
4
1 SEERVAI, CONSTITUTIONAL LAW OF INDIA (4th ed.) 269.
5
(1899) A.C. 580.
6
(1924) A.C. 328.
7
(1939) A.C. 117.
8
(1940) 3 All E.R. 269.
9
(1953) S.C.R. 1 (’53) A.SC. 375.
 State of Madhya Pradesh v. Mahalaxmi Fabric Mills & Ors.

In practice, the application of this doctrine involves an analysis of the relevant entries in the
Seventh Schedule. Usually, this would mean comparing the ambit of an Entry in List I (Union
List) to the ambit of an entry in List II (State List). In the instant case too, the Supreme Court
had to examine in detail the intricacies of Entries 49 (taxes on land and buildings) and 50 (taxes
on mineral rights subject to any limitation imposed by Parliament by law relating to mineral
development) of List II in the Seventh Schedule with close reference to Entry 54 (Regulation
of mines and mineral development to the extent to which such regulation and development
under the control of the Union is declared by Parliament by law to be expedient in the public
interest) of the Union List.

Over the course of this project, I will attempt to throw light on the specific issues that arose in
the case of State of Madhya Pradesh v. Mahalaxmi Fabric Mills and Ors.10 by appropriately
contextualising them in the relevant factual scenario that prevailed. I will also attempt to shed
some light on the reasoning that was employed by the Supreme Court in answering these issues,
and the effect of State of West Bengal v. Kesoram Industries11 on the aforementioned case.

10
AIR 1995 SC 2213.
11
(2004) 10 SC 201.
 State of Madhya Pradesh v. Mahalaxmi Fabric Mills & Ors.

III. FACTUAL ANALYSIS OF THE CASE

A. FACTS OF THE CASE.

This case was brought before the Supreme Court under Article 136 of the Constitution against
a decision of the High Court of Madhya Pradesh. The respondents in this case (original writ
petitioners) are purchasers of coal from Coal India Ltd., a public company.

The dispute arose because they complained that a Notification issued by the Union of India on
August 1, 1991 which sought to fix new rates of royalty on various varieties of coal was illegal
and inoperative in law. As compared to the old rate of Rs. 6.50 per ton the notification
mandated royalty at the rate of Rs. 120 per ton of coal.

This notification was issued under Section 9(3) of the Mines and Mineral (Development and
Regulation) Act. Accordingly, the petitioners submitted that the provision conferred unfettered
discretion to the Central Government to increase the rates of royalty, with no guidelines to
check such an exercise. Therefore, they contended that this was an excessive delegation of
power.

However, it is important to know why the 1991 notification was passed in the first place. In
1982, several coal-producing states imposed a coal development cess and started receiving
revenue for effecting development in the mining sector in their respective states. However,
upon challenge, this was found to be invalid in Orissa Cement Ltd. v. State of Orissa.12 In
trying to recover the financial loss caused by such an invalidation, the States had approached
the Central Government. The subsequently constituted working group suggested the increase
of the royalty payable, as a direct means of overcoming the financial loss suffered.
In this regard, it was contended by the petitioners that the royalty payable to the State
Governments by the coal companies was being passed onto the customers of the companies,
something which was clearly reflected in the bills issued.

12
1991 CriLJ 2191.
 State of Madhya Pradesh v. Mahalaxmi Fabric Mills & Ors.

Ultimately, the High Court found that Section 9(3) was itself constitutional, and did not suffer
from any constitutional deficiency. However, the Court ruled that the Notification passed by
the Union of India which sought to hike the royalty payable was mala fide in nature, as its
primary purpose was to meet the financial deficiency suffered by the States. The High Court
made no ruling on the refund of the illegally collected royalty, as the burden had already been
passed to the consumers.

Aggrieved by the quashing of the notification, an appeal under Article 136 was preferred by
the State of Madhya Pradesh.

B. ISSUES BEFORE THE COURT

There were four issues that the Court considered appropriate to determine the dispute at hand:

i. Whether Section 9(3) of the Act is ultra vires the Constitution and/or is illegal on
any other ground?
ii. Whether the impugned notification is beyond the scope of Section 9(3) of the Act
and, therefore, incompetent and invalid?
iii. Whether the impugned notification amounts to a colourable exercise of power?
iv. Whether the impugned notification is arbitrary and confiscatory in nature?

C. CONTENTIONS OF THE PARTIES

a. Contentions of the Appellants.

Unlike the contentions of the Respondent, there is no clear demarcation made by Justice
Majumdar in his treatment of the contentions of the Appellants.

However, the core of their contentions may be understood to include:

First, that by virtue of the Court’s holding in Orissa Cement Company, 13 the levy of royalty
was conclusively outside the mandate of the State Legislature. Accordingly, it was now

13
Id.
 State of Madhya Pradesh v. Mahalaxmi Fabric Mills & Ors.

exclusively under the legislative mandate of the Union, specifically under Entry 54 o the Union
List, and the only manner of exercising the power of increasing the royalty was by virtue of
Section 9(3). Therefore, there was nothing wrong in issuing the notification.

Second, the provision contained enough guidance to the Central Government for issuing such
a notification and therefore, that notification cannot be said to be ultra vires or illegal on
grounds of excessive delegation.

b. Contentions of the Respondents.

With regards to the first issue, it was argued that Section 9(3) of the Act violated the provisions
of the Constitution of India on two grounds:

First, that if royalty were to be considered a tax, there was to be a clear entry in the Union
List permitting Parliament to impose such a tax. Reliance was placed on International
Tourist Corporation and Ors. v. State of Haryana & Ors.14 and State of Mysore & Ors. v.
D. Cawasji & Co. & Ors.15 to support the contention that in the absence of such an explicit
entry on the Union List, this would come within the purview of Entry 50 of the State List
(tax on mineral rights). This would, therefore, render the provision outside the legislative
competence of Parliament.

Second, it was contended that there was excessive delegation of power to the Central
Government by way of Section 9(3) and no guidelines are provided in the Section as to
how the power to alter or increase the royalty rates was to be exercised.

Considering the second issue, it was put forth by the Learned Counsel for the Respondent that
the impugned notification was beyond the scope of Section 9. It was argued that the
Notification had nothing to do with the development of minerals but was issued only for
compensating the States who had suffered loss because of the striking down of the cess that
had been imposed on royalty. In this regard, the attention of the Court was drawn to cases such
as Dr. Shanti Saroop Sharma & Anr. v. State of Punjab & Ors.16 and the definitions of the term

14
[1981] 2 SCR 364.
15
[1971] 2 SCR 799.
16
AIR 1969 P&H 79.
 State of Madhya Pradesh v. Mahalaxmi Fabric Mills & Ors.

“royalty” as found in various dictionaries such as Wharton’s Law Lexicon, Stroud’s Judicial
Dictionary of Words and Phrases, Majley and Whiteley’s Dictionary, and Prem’s Judicial
Dictionary.

The primary point that the counsel sought to drive home was that all these authorities define
royalty as a pro-rata payment by the lessee to the lessor, on the usage of the land for the
development of mining patents. Given how the primary consideration in the instant case is the
realisation of financial loss that has been sustained, this royalty is beyond the scope of the
provision.

On the third issue, the primary contention made by the Respondents is that the purpose of the
royalty was not the development of mines or minerals. In fact, the primary concern behind the
imposition was the swelling of the coffers of the States. Therefore, by exploiting an entry that
allows for the development of mines and minerals, the Union sought to compensate the States
for their financial loss. Accordingly, it was also contended that the issuing of the notification
by the Union Government amounted to a colourable exercise of power since it was issued for
an “alien” purpose, i.e., one that was unrelated to the source of legislative competence.

Finally, with regards to the fourth issue, it was argued that the notification is arbitrary and
confiscatory in nature since the escalation of rates is to the tune of nearly 4000%, they have
become confiscatory in nature. Therefore, it was argued that it would fall foul of Articles 14
and 19(1)(g). However, it is to be kept in mind that this argument is dealt with very peripherally
in the case, and it is not substantiated by Justice Majumdar in his pronouncement of the
judgement.

D. HOLDING OF THE COURT

Overturning the decision of the High Court, the Supreme Court found in favour of the
Appellants on all four counts that were raised for consideration.

Considering the first issue, heavily relying on the Court’s decision in the case of Baijnath v.
State of Bihar,17the Court established that the relationship between Entry 54 of the Union List

17
[1970] 2 SCR 100.
 State of Madhya Pradesh v. Mahalaxmi Fabric Mills & Ors.

and Entry 23 of the State List was of such a nature that the latter was subject to the former. It
made clear that it is open to Parliament to declare that it is expedient in the public interest that
the control should vest in the Central Government. Once this is made and the extent specified,
the subject for legislation to the extent laid down becomes exclusive to Parliament.

In the instant case, Section 2 of the Act contained such a declaration, specifying that the
regulation of mines and minerals development under the control of the Union is expedient in
the interest of the public.

Further reliance was placed on the case of India Cement Ltd. and Ors. v. State of Tamil Nadu.18
In this case, Justice Sabyasachi had laid down that Section 9 of the Act and the imposition of
royalty is outside the legislative power of the States, and neither Entry 23 nor Entry 49 of the
State List include this in their ambit. The ruling in Laxminarayana Mining Co., Bangalore v.
Taluk Development Board19 also strengthens the position of law that once Parliament makes a
declaration, the power of State Legislatures under entries 23 and 50 stands denuded. However,
it is important to note the reliance placed by the Court on paragraph 34 of India Cement. The
Court refused to go into the issue of whether there was a typographical error in the proposition
laid down there, which said that royalty amounted to a tax. In fact, this proposition was central
to the Court’s contextualising the matter at hand.

Irrespective, in the Court’s eyes, the issue of competence stood answered.

It must be kept in mind that by virtue of finding the Central Legislature competent to enact
such a legislation, the question of colourable legislation also stands answered. Through their
deliberation, the Court found that the impugned legislation is valid, and legislative competence
is primarily derived from Entry 54 of the Union List. In reaching this conclusion, all
contentions alleging the lack of competence by virtue of Entries in List II were disregarded.
Therefore, the third issue in this case too was ruled in favour of the Appellants.

Tackling the question of excessive delegation, the Court observed that clear provision was
made for Parliament to increase the rates of royalty every three years to effectively tackle the

18
[1991] 188 ITR 690 (SC).
19
AIR (1972) Mys 299.
 State of Madhya Pradesh v. Mahalaxmi Fabric Mills & Ors.

fluctuations in the value of the rupee. This delegation was, in the view of the Court,
accompanied by guidelines on the exercise of such delegated power. The first of the guidelines
was that the increase could only be made once every three years and that Parliament had to
keep in mind the rate of inflation and the fall of money value of the rupee in determining the
rate of royalty. Secondly, Parliament had to keep in mind the base rates that had been specified
in the IInd Schedule of the Act before making any alteration. Further, this payment was to be
made by the holders of mining leases keeping in mind the core object and purpose of the Act:
the development of mines and minerals. Therefore, since there were sufficient guidelines, the
Court ruled that there was no excessive delegation at play.

Moving onto the second issue, the Court ruled that by virtue of the declaration contained within
Section 2 of the Mines and Minerals (Development and Regulation) Act, the entirety of the Act
was within the legislative competence of the Union. This meant that Section 9 and the power
to issue notifications (such as the impugned notification in this case) are also contained within
the purview of the Union’s legislative mandate.

The Court went on to tackle the primary contention of the original writ petitioners that there
was no nexus between the imposition of the royalty and the development of mines and
minerals, which is the source of legislative authority. It was made clear that the regulation of
rates of royalty on extraction of minerals has an important role to play in ensuring that there is
a uniform pattern for the price of minerals, something that is essential for the development of
mines and minerals. Therefore, exercise of the power to change the rates of royalty cannot be
said to be distinct from the development of mines and minerals. The two are inextricably linked.
This exercise is only further legitimised by the fact that Section 18 of the Act lays down that it
is the duty of the Central Government to take all steps as may be necessary for the conservation
and systematic development of minerals in India.

The Court went on to say that the expansion of the coffers of the respective States cannot be
regarded to be an irrelevant consideration. In fact, it is a logical corollary of the enhanced rates
of royalty and will remain a relevant consideration because it is the duty of States to monitor
the working of the mines and the development of mines in their respective territories. As a
result, this too cannot be said to be violative of Section 9(3) by virtue of being outside its scope.
 State of Madhya Pradesh v. Mahalaxmi Fabric Mills & Ors.

As for the fourth and final issue framed by the Court, it was held that this notification cannot
be regarded to be arbitrary or confiscatory in nature. The Court held that there was a paucity
of evidence placed before it to suggest that the hike in the royalty rates amounted to any adverse
effect on the business of the respondents or their livelihood. Further, there was nothing to show
that the burden had not been passed on to the ultimate customers of coal by the lessee of the
mines. Therefore, the contention of the respondents was held to be unsustainable in the law.
Therefore, all the contentions of the respondents were rejected by the Court in this case, and
the judgement was rendered in favour of the Appellants.
 State of Madhya Pradesh v. Mahalaxmi Fabric Mills & Ors.

IV. CONCLUSION AND ANALYSIS

In the instant case, reliance has been placed on the proposition that royalty is a tax. This is with
specific reference to the case of India Cement20, the holding in which was upheld in both Orissa
Cement21 as well as Laxminarayan Mining Co.22

It must be noted that, as has been mentioned earlier, the reliance on India Cement is not without
problems. Paragraph 34 of the judgement of the court holds that royalty is a tax, but the same
has long been debated to have been a typographical error on the part of the stenographer.
Therefore, the heavy reliance placed on it not only in this case, but in those aforementioned as
well, affords ambiguity.

This proposition was tackled by the Supreme Court in the case of State of West Bengal v.
Kesoram Industries.23 It was observed that royalty is not a tax, and cannot be a tax. The Court
remarked that it was obliged “constitutionally, legally, and morally to do so, lest the said error
should cause any further harm to the trend of jurisprudential thought centering around the
meaning of ‘royalty’.” In making this observation, the Court directed explicit dissent toward
the judgement in the instant case.

Further, it was clarified in this 2004 judgement that the finding in India Cement was also that
royalty was not a tax, but instead that cess on royalty amounted to a tax. The reason this
clarification is so important is that if royalty is disregarded to be a tax, the judgement of the
Court in the instant case cannot be taken to be valid. In fact, the judgement in Kesoram
Industries has effectively overruled the law laid down by the Court in the instant case, since
the presumption that royalty was a tax was central to the Court’s analysis of the four issues that
presented themselves for consideration.

Therefore, it becomes interesting to note whether or not there would have been any
applicability of the doctrine of colourable legislation if the interpretation in Kesoram Industries

20
Supra note 18.
21
Supra note 12.
22
Supra note 19.
23
Supra note 11.
 State of Madhya Pradesh v. Mahalaxmi Fabric Mills & Ors.

is adopted. What becomes abundantly clear is that Entries 49 and 50 of the State List become
inapplicable, since they are specifically taxing entries. However, with regard to the relationship
between Entry 54 of the Union List and Entry 23 of the State List, it is unclear as to whether
the competence of the Union can be regarded to subsist.

Owing to the fact that the entire reasoning of the Court is predicated on the concept of royalty
being a tax, it cannot be said that the reasoning of the Court and the holding in the instant case
is valid. However, while the reasoning of the Court may not be regarded to be valid anymore,
the same effect may be extended to the legislative competence of Parliament and the State
Legislatures.

This could potentially attract the application of the doctrine of colourable legislation, and
would be a separate line of inquiry into whether or not increase in the rates of royalty is within
the legislative competence of the Parliament. However, given that the same is inextricably in
the interest of developing mines and minerals, and generating income for States, it may be seen
to come within the purview of Entry 54 of the Union List, and thereby within the legislative
competence of Parliament.

However, this is an independent question and not one which can be seen to operate in the facts
of the current case. By virtue of the reasoning being undermined by a fundamental flaw in the
interpretation of the jurisprudence of the Court, we may conclude that this case is overruled
and may be regarded as a wrong application of relevant concepts.