Holding

Section 4(2) of the Kerala Fishermen's Welfare Fund Act, 1985 is unconstitutional because the State cannot impose a contribution on dealers who are not employers of the fishermen, as required by Entry 23 of List III.

Summary

Koluthara Exports Ltd., a dealer engaged in buying and exporting fish, was served with a notice under Section 4(2) of the Kerala Fishermen's Welfare Fund Act, 1985 requiring it to contribute one per cent of its sales proceeds to a welfare fund for fishermen. The company challenged the constitutional validity of this contribution, arguing that there was no employer‑employee relationship between it and the fishermen and that the State lacked legislative competence to impose such an impost. The Kerala High Court upheld the provision, holding that an intimate nexus between exporters and fishermen sufficed, but the Supreme Court reversed this view. The Court held that under Entry 23 of List III, a contribution can be levied only where a contributor is an employer of the beneficiary, which was not the case here, rendering Section 4(2) unconstitutional. While the provision was struck down, the Court ordered that contributions already paid would not be refunded. Consequently, the appeal was allowed and the High Court’s order set aside.

Issues considered

Whether Section 4(2) of the Kerala Fishermen's Welfare Fund Act, 1985, which imposes a 1% contribution on dealers, is constitutionally valid under Entry 23 of List III of the Seventh Schedule.
Whether a contribution can be levied on a person who is not an employer of the beneficiaries under the welfare scheme.
Whether the contribution constitutes a tax, fee, or a permissible social security contribution.

Legislation cited

Employees' State Insurance Act, 1948

Subjects

constitutional lawlegislative competencesocial securitywelfare fundemployer-employee relationshipEntry 23 List IIItax vs feecontributory levy

Judgment

KOLUTHARA EXPORTS LTD. A
v.
ST ATE OF KERALA AND ORS.

- ~

FEBRUARY l, 2002

[S.P. BHARUCHA, C.J., SYED SHAH MOHAMMED QUADRI, B
UMESH C. BANERJEE, S.N. VARIAVA AND
SHIVARAJ V. PATIL, JJ.]

" Constitution of India-Articles 39, 4 I, Seventh Schedule, List III. Entry
c
23-Kerala Fishermen's Welfare Fund Act, 1985-Section 4(2) read with
Section 2{d)-Fisherman's Welfare Fund Scheme-Contribution to--Welfare
Fund Act requiring the dealer to contribute one per cent of sale proceeds to
the fund-Validity of-Held, impost by way of contribution can be levied only
when there exists the relationship of:employer and employee between the
contributor and the beneficiary under the Act and the scheme-The contribution D
envisaged under Section 4(2) of the Act is clearly outside the ambit of Entry
> 23 of List Ill-Thus, Section 4(2) of the Act is unconstitutional-However,
amount of contribution a/Jeady collected not liable to be refunded

Words and Phrases:
E
"dea/er"-Meaning of in the context of Section 2(d) of the Kera/a
Fishermen's Welfare Fund Act, 1985.

., The issue involved in the present appeal was whether the provisions
of Section 4(2) read with Section 2(d) of the Kerala Fishermen's Welfare
Fund Act, 1985 requiring a dealer to contribute one per cent of sale
F
proceeds towards the welfare fund scheme is constitutional.

Appellant-Company engaged in purchase and export of fish was
served with a notice under Section 4(2) of the Act and order of assessment
was passed. Appellant-Company filed a writ petition challenging the G
constitutional validity of the assessment order and Section 4(2) of the Act.
High Court upheld the constitutional validity of the Section on the ground
that there was very intimate nexus between the fisherman and an exporter
of the marine products like the appellant and the employee-employer
relationship was not necessary in such cases. Hence the present appeal
775 H
776 SUPREME COURT REPORTS (2002] I S.C.R.
\
A which has been referred to the Constitution Bench since the question
involved was touching the interpretation of the Constitution.

Allowing the appeal, the Court ~
.....
HELD : 1.1. Section 4(2) read with Section 2(d) of the Kerala
B Fishermen's Welfare Act, 1985 requiring a dealer to contribute one per
cent of the sale proceeds to the welfare fund scheme is declared to ·be
unconstitutional. Consequently, the order of High Court under challenge
is set aside. However, the amount of contributions, already paid by persons
falling under Section 4(2); will not be liable to be refunded to the dealers-
contributors by the Board. [780-G; 785-C-E)
c "
1.2. There can be no doubt that Entry 23 enables the State
Legislature to enact a law in respect of social security and social insurance
or dealing with employment and unemployment. But, the State cannot, in
an Act under Entry 23 of List III, place the burden of an impost by way
of contribution for giving effect to the Act and the scheme made
D
thereunder for the social security and social welfare of a section of society
upon a person who is not a member of such section of society nor an
employer of a person who is a member of such section of society. The
burden of such impost may be placed only when there exists the
relationship of employer and employee between the contributor and the
E beneficiary of the provisions of the Act and the scheme made thereunder.
[783-D-E]

1.3. In the instant case, the only nexus between the categories of
persons covered by the sweep of Section 2(d) of the Act, including the
appellant, who carry on the business of buying or selling or processing
F fish or exporting fish (in raw or processed form) or fish products, including •
- (i) a commission agent, broker or any other mercantile agent and (ii) a
non-resident dealer or an agent or a non-resident dealer or a local branch
of a firm or company or association situated outside the State and the
beneficiaries under the Act and th'! scheme - the fisherman - is that the
G former are the purchasers and the latter are the catchers and sellers of
fish. Such a nexus, is not sufficient to burden a purchaser/exporter with
the impost or levy of the contribution under Section 4(2) of the Act, which
will clearly be outside the ambit of Entry 23 of List Ill of the Constitution
and, therefore, lacking legislative competence. (784-H; 785-A-B)

H Gasket Radiators Pvt. Ltd. v. Employees' State Insurance Corporation
)
KOLUTHARA EXPORTS LTD. v. STA TE [QUAD RI, J.) 777

and Anr., 11985) 2 SCC 68 and Mangalore Ganesh Beedi Works ect. etc. v. A
Union of India etc., (1974) 3 SCR 221, relied on.

Regional Executive Kera/a Fishermen's Welfare Fund Boardv. Fancy
Food and Anr., [l995) 4 SCC 341, distinguished.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 12788 of B
1996.

From the Judgment and Order dated 22.8.96 of the Kerala High Court
in O.P. No. 19806 of 1995.
>
V.R. Reddy and K.N. Bhat, A.K. Jain, Rajesh Jain, Rajesh Kumar, c
C.V.Francis, Ramesh Babu M.R., T.G. Narayanan Nair and K.R. Sasiprabhu
for G. Prakash for the appearing parties.

The Judgment of the Court was delivered by

SYED SHAH MOHAMMED QUADRI, J. This appeal arises from D
the judgment and order of a Division Bench of the High Court of Kerala at
>- Ernakulam upholding the constitutional validity of Section 4(2) read with
Section 2(d) of the Kerala Fishermen's Welfare Fund Act, 1985 (Act 30 of
1985) (as amended by Act 15 of 1987) (for short, 'the Act') in O.P. No.
19806 of 1995 and the batch by the common judgment dated August 22/23,
1996.
E

On September 25, 1997 when this appeal came up for hearing before
a Bench of two learned Judges of this Court, it was noticed that a Bench of
three learned Judges of this Court in Gasket Radiators Pvt. Ltd. v. Employees'
~
State Insurance Corporation and Anr., [1985) 2 SCC 68 had taken the view F
that any contribution imposed by State Legislation under Entry 23 of the
Concurrent List would not amount to either tax or fee, which was relied upon
by the respondent-State and that the appellant placed reliance on decisions of
the Constitution Bench of this Court in The Corporation of Calcutta & Anr.
v. Liberty Cinema, AIR (1965) SC 1107 and Mis. Hoechst Pharmaceuticals
Ltd. & Anr. v. State of Bihar and Ors., AIR (1983) SC 1019. It was submitted G
that compulsory impost could be either by way of tax or fee and that the
definition of 'taxation' as found in Article 366 (28) of the Constitution of
India and the said cases were not considered in Gasket Radiators {supra).
The appeal was, therefore, referred to a Bench of three learned Judges. The
Bench of three learned Judges opined that in Gasket Radiators (supra), a H
778 SUPREME COURT REPORTS [2002] I S.C.R.

A concept of impost in the form of compulsory contribution had been given
birth to and whether such birth should further multiply was a question touching
the interpretation of the Constitution and referred the appeal to a Constitution
Bench of five Hon'ble Judges. That is how this appeal has come up before
us.

B Mr. AK. Jain, the learned counsel appearing for the appellant, contended
that the appellant was a purchaser and exporter of fishes and there was no
relationship of employer and employee between the appellant and the fishermen
as such the Legislature cannot levy impost by way of contribution on it under
Section 4(2) of the Act and that the impugned provision was bad for want of
C legislative competence.

Mr. K.N. Bhat, the learned senior counsel appearing for the State of
Kcrala (respondent Nos. I and 2), has argued that the Act and th.e scheme
framed thereunder are welfare legislation as postulated in Articles 39 and 41
of the Constitution for the benefit of the fishermen who are members of poor
D and downtrodden community. His further submission was that a legislation
under Entry 23 of List III of the Seventh Schedule of the Constitution requiring
one set of persons to pay contributions for the benefit of another set of
persons, is valid and there need not be relationship of employer and employee
between them. To sustain the validity of Section 4(2) of the Act he relied on
E the decisions of this Court in Mangalore Ganesh Beedi Works etc. etc. v.
Union of India etc., [1974] 3 SCR 221 and Gasket Radiators (supra). He
submitted that this Court in Regional Executive, Kera/a Fishermen's Welfare
Fund Board v. Fancy Food & Anr., [1995] 4 SCC 341 had held that the
appellant was a dealer and liable to pay contributions under the Act.

F Mr. V.R. Reddy, the learned senior counsel appearing for the Welfare
Fund Board (respondent No. 3) while adopting the argument of Mr. Bhat,
sought to justify the impost as fee but inasmuch as the learned Advocate-
General of the State of Kerala had taken a stand before the High Court that
the impost was neither tax nor fee we did not permit him to urge that
G contention.

In view of the stand of the State that the impost under Section 4(2) of
the Act is neither tax nor fee, it wou Id not be necessary to consider the
definition of'taxation' in Article 366(28) of the Constitution and the decisions
of this Court in Corporation of Calcutta and Mis. Hoechst Pharmaceuticals
H Ltd. (supra).
)
KOLUTHARA EXPORTS LTD. v. STATE [QUADRI, J.] 779
The short but important question that arises is : whether the impugned A
impost levied under Section 4(2) read with Section 2( d) of the Act, is
unconstitutional for want of legislative competence of the State of Kerala.

To comprehend the nature and the extent of the impost, it will be useful
to refer to the relevant provisions of the Act.
B
Section 2 defines various terms employed in the Act. Section 3 speaks
of Fishermen's Welfare Fund Scheme. Sub-section (!) of SectioA 3 of the
Act enables the Government to frame a scheme to be called 'the Kerala
Fishermen's Welfare Fund Scheme' (for short, 'the scheme') for the
establishment of a fund under the Act by name "the Kerala Fishermen's C
Welfare Fund" (for short, 'the fund') for the welfare of fishermen and directs
that soon after the framing of the scheme the fund shall be established in
accordance with the provisions of the Act and the scheme. Various items of
amounts which form constituents of the fund and are required to be credited
to the fund are enumerated in sub-section (2). Clause (a) of sub-section (2)
refers to contributions required to be made under section 4 of the Act. Sub- D
section (3) directs that the fund shall be vested in and administered by the
Board and sub-section ( 4) enumerates the objects of the fund. They are as
under:

"3. Fishermen's Welfare Fund Scheme.-
E
(!)to (3) *** *** ***

(4) The fund may be utilised for all or any of the following purposes,
namely :-
• (a) to provide for distress relief to fishermen in times of natural F
calamities;

(b) for payment of financial assistance to fishermen who suffer
permanent or temporary disablement;

(c) for payment of loans or grants to fishermen to meet the
expenses for the marriage of children, or expenses in
G
connection with disease or death of dependants, or any
unexpected expenditure or the day to day expenditure during
loan months;

(d) to provide for the fishermen and the members of their H
780 SUPREME COURT REPORTS (2002] I S.C.R.

A families,-

(i) education, vocational training and part-time employment;

(ii) social education centres including reading rooms and
libraries;
B (iii) sports, games and medical facilities;

(iv) nutritious food for children; and

(v) employment opportunities to the handicapped;

c (e) for payment of financial assistance to fishermen who suffer
loss of houses or fishing implements or any other damage
due to natural calamities or other unexpected causes;

(f) to provide old age assistance to fishermen;

(g) for the implementation of any other purpose specified in the
D scheme,"

Sub-section (5) says that every fisherman who is a member of a
Fishermen's Welfare Society constituted under Section 4 of the Kerala
Fishermen Welfare Societies Act, 1980 (7of1981) shall be a member of the
fund and sub-section (6) says that the scheme framed under sub-section(!)
E may provide for all or any of the matters specified in sub-section (4) and in
the Schedule.

Section 4 of the Act contains the list of contributors to the fund. Sub-
section (2) of Section 4 which is impugned reads as under :

F "4. Contribution to the Fund-

(I) - (IA)*********

(2) A dealer shall contribute to the Fund, every year, one per cent of
his sale proceeds in the year."
G Clause (d) of Section 2 defines the term 'dealer' in the following terms:

"2. Definitions:-ln this Act, unless the context otherwise requires, -

(a) to (c) *** *** ***

H (d) "dealer" means any person who carries on, within the State of
- J RAGHURAM RAO v. ERIC. P. MATHIAS [SHAH, J.] 781
'
Kerala, the business of buying or selling or processing fish or exporting A
fish (in raw or processed form) or fish products and includes, - (i) a
-.,, commission agent, a broker or any other mercantile agent, by whatever
<
name called; and (ii) a non-resident dealer or an agent of a non-
resident dealer or a local branch of a firm or company or association
situated outside the State of Kerala."
B
Section 12 prescribes the mode for determination of contribution and Section
13 deals with provisional assessment and collection of advance contribution.

The appellant, a dealer under the Act, was served with a notice by the
Board under Section 4(2) of the Act for the period 1988-89 to 1994-95
calling upon it to show cause why contribution under Section 4 (2) of the Act c
should not be demanded from it. It is alleged that without considering the
objections, the order of assessment was passed against it on November 30,
1,995. This prompted the .appellant to challenge the validity of the assessment
order and Section 4(2) of the Act, in the aforementioned writ petition in the
High Court of Kerala at Emakulam which was dismissed by the common D
judgmenvon August 22/23, 1996. It is against that order that the appellant is
-. in appeal before this Court.

Having regard to the objects of the Act, the High Court opined that the
fishermen are the ultimate beneficiaries of this benevolent legislation. They
fight against the surging waves in the sea for catches of the fishes which after E
changing hands, reach the exporters for being exported to foreign countries.
The fishermen are the backbone of the industry and without them the industry
cannot exist and unless they are kept in good humour, the industry cannot
nourish or flourish. Therefore, there is very intimate nexus between the
fishermen and an exporter of the marine products like the appellant. The
learned judges of the High Court also opined that the employee-employer
F
relationship was not wanting in the cases.

The Statement of Objects and Reasons of the impugned Act shows that
the fishermen belong to one of the weakest sections of our society. The
reasons for their poor socio-economic condition are stated to be manifold.
G
During off-season and lean months as ·well as on special occasions like
marriage, death, religious and social functions etc., in the families, the poor
-. fishermen are forced to borrow heavily from local money lenders or owners
of craft at exorbitant rates of interest. They often fail to clear off the
accumulated debts with the result, they are permanently indebted to the money
lenders and also forced to sell away the fruits of their hard labour at the H
782 SUPREME COURT REPORTS [2002) I S.C.R.

A prices dictated by the money lenders. Due to the risky nature of their
occupation they are prone to accidents. They are subjected to loss of houses
and fishing implements due to natural calamities. There is need for providing
adequate educational facilities and vocatio11al training and for providing old
age assistance to them.

B The Preamble to the Constitution records the resolve of the people of
India to secure to all its citizens Justice, inter alia, social, economic and
political. Part IV of the Constitution embodies the Directive Principles of
State Policy which, though not enforceable by any court, are fundamental in
the governance of the country. Article 39 enjoins that it shall be the duty of
C the State to apply those principles in making laws. Clauses (b), (c) and (e)
respectively of Article 39 lay down that the State shall, in particular, direct
its policy towards securing that the ownership and control of material resources
of the community are so distributed as best to subserve the common good;
that the operation of economic system does not result in concentration of
wealth and means of production to the common detriment and that the health
D and strength of workers, men and women, and the tender age of children are
not abused and that citizens are not forced by economic necessity to enter
avocations unsuited to their age or strength. Article 41 directs that the State
shall, within the limits of its economic capacity and development (emphasis
supplied), make effective provision for securing the right to work, to education
E and to public assistance in cases of unemployment, old age, sickness and
disablement, and in other cases of undeserved want.

Keeping these constitutional objectives and the Statement of Objects
and Reasons in mind it cannot but be said that the Act and the establishment
of welfare fund thereunder for requirements of fishermen outlined in sub-
F section (4) of Section 3 of the Act is a commendable legislation. It will be
apt to refer to the observations of Alagiriswami, J. in his concurring opinion
in Mangalore Ganesh Beedi Works (supra) :
"Nobody can dispute the need for setting right those evils. But
good intentions should not result in a legislation which would become
G ineffective and lead to a lot of fruitless litigation over the years."

Now adverting to the constitutional validity of the impugned provisions,
it must be remembered that Part IV of the Constitution contains, as noticed t
above, fundamental principles in governance of the country. They indicate
and determine the direction for the State but they are not legislative heads or
H the fields of legislation like the Entries in the Lists I, II and III of the Seventh
RAGHURAM RAO v. ERIC. P. MATHIAS [SHAH, J.] 783

Schedule of the Constitution. When any statute of a State or any provision A
therein is questioned on the ground of lack of legislative competence, the
State cannot claim legitimacy for enacting the impugned provisions with
reference to the provisions in Part IV of the Constitution; the legislative
competence must be demonstrated with reference to one or more of the
Entries in Lists II and III of the Seventh Schedule of the Constitution. It is
stated that the legislative competence is referable to Entry 23 of the Concurrent B
List, which may be extracted here :

"List III - Concurrent List-

23. Social security and social insurance; employment and C
unemployment."

There can be no doubt that Entry 23 enables the State Legislature to enact
a law in respect of social security and social insurance or dealing with
employment and unemployment. The provisions of sub-section (4) of Section
3 of the Act (quoted above) postulate social security and welfare measures D
for the fishermen. The State can, therefore, justify its competence under this
Entry. But, in our view, the State cannot, in an Act under Entry 23 of List
III, place the burden of an impost by way of contribution for giving effect
to the Act and the scheme made thereunder for the social security and social
welfare of a section of society upon a person who is not a member of such
section of society nor an employer of a person who is a member of such E
section of society. The burden of the impost may be placed only when there
exists the relationship of employer and employee between the contributor
and the beneficiary of the provisions of the Act and the scheme made
thereunder.
F
The validity of Employees' State Insurance Act, 1948, in regard to
special contribution of the employer under Chapter V-A of the said Act, was
brought under challenge in appeal before a three-judge Bench of this Court
in Gasket Radiators (supra). The Court held that the payment of contribution
by an employer towards the premium of an employee's compulsory insurance
under the Employees' State Insurance Act fell directly under Entries 23 and G
24 of List III. It was also held that the contributions under the Act or
-,. contributions to provident fund or payments of other benefits to workers are
neither taxes nor fees and that they fall within the ambit of Entries 23 and
· 24 of List Ill. We are in agreement with the observations of Chinnappa
Reddy, J. who speaking for the Court observed : H
784 SUPREME COURT REPORTS [2002] I S.C.R.

A "In our understanding, Entries 23 and 24 of List III, of their own
force, empower Parliament or the Legislature of a State to direct the
payment by ~n employer of contributions of the nature of those
contemplated by the Employees' State Insurance Act for the benefit
of the employees."

B In Manga/ore Ganesh Beedi Works (supra), the constitutional validity
of Sections 3, 4, 2(g), 2(g)(h), 2(m), 26, 27 and 31 of the Beedi and Cigar
Workers (Condition of Employment) Act, 1966 was assailed on the ground
of lack of legislative competence in the Parliament to enact such a law.
Having noticed the special feature of the industry of manufacture of beedi
C through various categories of workers, the said Act was passed by the
Parliament to provide for the welfare of workers in beedi and cigar
establishments and to regulate the conditions of their work and for matters
connected therewith. A Constitution Bench of this Court held that having
regard to the true nature and character of the legislation meant for enforcing
better conditions of labour amongst those who are engaged in the manufacture
D of beedis and cigars, the said Act, in pith and substance, was for welfare of
the labour falling within Entries 22, 23 and 24 of List Ill. It was pointed out
that the said Act had fastened liability on the person who himself engaged
labour or the person for whom or on whose behalf labour was engaged or the
person who had ultimate control over the affairs of the establishment by
reason of advancement of money or of substantial interest in the control of
R the affairs of the establishment. Thus, it is clear that in that case the impugned
legislation, while creating welfare scheme for beedi workers, levied impost
by way of contributions on the employer or a person in the position of an
employer.

F In Regional Executive Kera/a Fishermen's Welfare Fund Board (supra),
the question before this Court was whether exporters of fish meat, carrying
on business of buying processed fish and exporting the same, fell within the
meaning of'dealer' under Section 4(2) of the Act. The legislative competence
of the State Legislature and the constitutional validity of Section 4(2) of the
Act did not arise for the consideration of the Court in that case. That case,
G therefore, does not advance the case of the respondents.
In the instant case, the only nexus between the categories of persons f
covered by the sweep of sub-section (d) of Section 2 of the Act, including
the appellant, who carry on the business of buying or selling or processing
H fish or exporting fish (in raw or processed form) or fish products, including
RAGHURAM RAOv. ERIC. P. MATHIAS [SHAH, J.) 785

- (i) a commission agent, a broker or any other mercantile agent, by whatever A
name called, and (ii) a non-resident dealer or an agent or a non-resident
dealer or a local branch of a firm or company or association situated outside
the State of Kerala and the beneficiaries under the Act and the scheme - the
fishermen - is that the former are the purchasers and the latter are the catchers
and sellers of fish. Such a nexus, in our view, is not sufficient to burden a B
purchaser/exporter with the impost or levy of the contribution under Section
4(2) of the Act, which will clearly be outside the ambit of Entry 23 of List
III of the Constitution and, therefore, lacking legislative competence.

For these reasons, Section 4(2) of the Act is declared to be
unconstitutional. Consequently, the order under challenge is set aside. The C
writ petition shall stand allowed to that extent.

Mr. V.R. Reddy submitted that the amounts, credited to the welfare
fund by dealers under Section 4(2) of the Act, had been expended by the
Board for purposes of the Act and the scheme so this Court might be pleased
to relieve the Board of the obligation to refund the amounts to the dealers- D
contributors. On hearing Mr. Jain and on careful consideration of the
submission of Mr. Reddy, we direct that pursuant to the declaration of
invalidity of Section 4(2) of the Act, the amount of contributions, already
paid by persons falling under Section 4(2), will not be liable to be refunded
to the dealers-contributors by the Board.
E
The appeal is allowed accordingly. In the circumstances of the case, we
make no order as to costs.

S.V.K.I. Appeal allowed.