Holding

An auction‑created licence is a statutory contract not subject to Article 299(1), and the State may recover both the shortfall on re‑auction and the unpaid licence‑fee instalments.

Summary

The State of Haryana auctioned a licence to vend country liquor; the highest bidders, Lal Chand and others, were provisionally accepted but failed to deposit the required security and later argued that a neighbouring Punjab licence breached inter‑state conditions. The State re‑auctioned the licence at a lower price and issued a notice demanding the shortfall and defaulted licence‑fee instalments. The Supreme Court held that such auctions create statutory contracts, which are not governed by Article 299(1) of the Constitution, and therefore the State could enforce the contractual obligations, recover the difference between the original bid and the re‑auction price, and demand the unpaid instalments. The Court also found that the re‑auction complied with the statutory rules, rejecting the respondents' claim that they could withdraw their bid. Consequently, the High Court’s order quashing the demand notices was set aside and the writ petitions dismissed.

Issues considered

Whether a licence obtained by public auction under the Punjab Excise Act constitutes a statutory contract outside the ambit of Article 299(1).
Whether the State is entitled to recover the shortfall between the original bid amount and the amount realised on re‑auction.
Whether the State can recover defaulted instalments of the licence fee.
Whether the re‑auction complied with Rule 36(3) of the Punjab Liquor Licence Rules, 1956.
Whether the respondents could lawfully withdraw their bid and avoid liability.

Legislation cited

Indian Contract Act, 1872
Punjab Excise Act, 1914s. 27, s. 34, s. 59, s. 60
Punjab Liquor Licence Rules, 1956s. 36(2), s. 36(22), s. 36(22A), s. 36(23), s. 36(23A), s. 36(3), s. 36(4)

Subjects

statutory contractArticle 299(1)excise licencepublic auctionshortfall recoverylicence fee instalmentsconstitutional lawPunjab Excise Act

Judgment

715

STATE OF HARYANA & ORS. A
v.
•
LAL CHAND & ORS:

May 2, 1984 B

. · (D.A. DESAI, A.P. SEN AND V. BALAKR!Sf!NA ERADI, JJ.J

Constitution of India 1950·, Article 299(1) Condition ,to be satisfied before .:z
bfndi~g Co!Uract between the Union or State c~mes into existen1:e-What are. Con· 0
tracts execued in exercise of statutary power and contracts which are Statu.f_ory.in
nature-Existence of distinction indicated--.Article 299(1) inappli<~able wizen Uni.1n
or StGte .enters int(] a contrart.'which is statutory in nature,

Excise_Contract;_A statutory contract-Requirements Of Article 299(1) cannot
be invoked.
D
Punjab Excise Act 1914, Section 60 &.- Punjab .Lf{zuor Licence Rules 1956,
.Rules 32(2), 36(22), 36(23), an:/ 36(23A) .

•• Excise Contract-Reauction-Recovery of difference between bid amount in
original auction aiid that fetch€d in reauctidn_;_State whether entitled to recove,. the
dijfere~tia/ amoqnl from the original licencee. E

Indian Contract Act 1872. Co1nmercial Contrat:t-:Perforn1ance of-Definit.e
time fixed and mode ofpa;iment specified-Time essence of such contract-Excise
contract-Time whether essence of contract. ·
F
The I)~puty Excise&· Taxation Coni1nissiorier held an auction for gfantiog
the right to sell country-Liquor 'for liquor v~nd.. The respondents olTered tfie ·
• highest bid.which \vas .provisionally acc.epted and they were declared the highest
bidder under Rule 36(2)' of the Punjab 'Liquor Licence Rules J956. Sub-
sequently, the Excise and Taxation Coin missioner accepted the bid as. requi.red
-· Rule 36{22). The resp0ndents however failed to depos'it the security amount as G
required under Rule 3fi(22A)' and thereby contravened -conditions No- 15(1) of
the co~ditions o.f auction and Rule 36(23)'. the Deputy EXcise & Taxation
Commissioner therefore serVed the respond:.::nt<; with a notice to show-cau~c
why the licence for c~untry liquor vend, shoul-i not be rc-:iuction under Rule
36('!3A) and ihe ,~eficicncy in· price, a n_d all expenses of su·-.:h re-auctjon rl?covered

.. J,
from them under S:!ction 60 of the Punjab Excise Act, 1914. The n~spondents
reprcse.nted t4at b:'!forc the auction it \Vas announcej that no wine shop
would be opened wit-bin a radius of thrCe miles of the liquor vend but acro5s
the bo1der the State Government of J'unjab had sanctioned the establishment of
H

•
716 SUPREME COURT REPORTS [l9f4] 3 H .R

a liquor Shop Which was hardly 2-1 {1 miles from the border and tbis·-would inean
that there would be two_ country liquor shops one in the State of IIaryana and
the Other in the State of Punjab and this was in breach of condition No. 13(iii) . ,
.real! with. Rule 37(88) of the Rules. The Deputy Excise and Taxation Commis·
sioner reJected the representation alld directed the re.sale of the licence fot retail
vend of the cOuntry•liquor shop under :Rule 36(23). Th•shop_Was re~auctioned. ·:
At the time. of re-auction f~1ere were 52 bidders and the shop Was re~sold at
the highest bid of Rs. 6.65 lakhs. The respondents were served with a notice of
demand of Rs 3.46 lakhs representing the loss on re-.sale. ~
. '

.f
• Ill their writ petitions. to the.High Court the res pendents as~ailed the notice
of demand. Followiilg the decision in Ka~1hi'ya Lal_ Bhatia & Co. v. State of
Ha•yaita & Ors. the High Court held that.the State had no authority to demand
0 the amounts for failure of which the·.vends were put to re,;.auction on the ground
1hat the licence fee levied was in the nature .of excise duty ..

' ·Jn the. Appeals to this Court, on the question whether_ the State Governn1ent
was-entitled to realise the difference which· the respondents ·had agreed to. pay
un(\er the terms of auct~on of a liquor vend and the amo1.Jnt realized ori re~
auction of the vend, as also the defaulted instalments of the licence fee payable
•
D ~n respect of a liquor vend :

Allowing the appeals,

HELD: t. (i) There i~ a distinction between contracts which are executed in
exercise of _the executive powers and contracts which are statutory in· natureA
Under Att.299 (1), thrr!e conditions b'ave to be satisfied before a binding contract.
E by the Union or th~ State~in exercise.of the executive power comes into t--Xistence :
(1) The contract must be expressed' to be made by the PresiJent or the Governor.
as· the case may be . .(2) It must be executed in writing. And - (3) the execution
.thereof shollld be by such person and in such manner. as the President or the.· ·
Governor' may direct or. 3.uthoriZe. There call be doubt that a·contract which has
to be execut.ed iri ·accordance with Art. 299(1) is nulli6ed a;-id.becomes vOid if the
F contr;ct is not executed in conforffiity with the provis'ions .of Art. 299(1) -an(i
.• there is no question Of estoppel or ·ratificati6n in such,.case;. 'Nor can there by
· any irqplied Contrac~ between the Government and another person. [726CE]

Smi. Nanhibai v. The Excise. Commissioner, M.P. & Ors., AIR (1963) MP •
. ·)..... ~-
352, ieferred to. · ·

G Ram Rattan Gllpta v. State. of M-P., AIR (1974) MP 101. Ajodhya Prasad
Shaiv & Anr. v. State of Ori<Sa & Ors.; AIR (1971) Ori., 158, M/S shree Krishna
Gyanoday_ Sugar Ltd. & Anr. v, State of Bihar & Anr., AIR (1975) Pat. 123;
approved.

(ii) Art. 299(1) applies to a Contract made in exercise of the executive
power of the Union or the Sta.te~ but not to a contraCt made in exercise of
H statutory-power. Art. 299(l) has no application to a case where_a particular •
statutory authority a-s distinguished from the Union or the States enters into ·a •
contract which is statutory in nature. Such 'a contract. even though it is for
•
• •
HAR,YANA v. LAL CHAND 717
securing the interests of the Union or ·the States. is not a contract which has
been entered into by or on behalf of the Union or the State in exercise. of it'i A
executive powers. [726F-G]

K.P. Chowdhary v. S!.7te of MP., [1966] 3 SCR 9!9, Mulamchand v. State of
M.P., [1968] 3 SCR 214, State of MP. v. Rattan Lal, [196l] MPLJ 104, State of
1!f.P., v. Firm Gobardhan DaS9 Kai/ash Nath, AIR [l97'J SC I 160, referred to. •
B
i (iii) Jn ~Ii excise contract, the Collector acting as Depl1ty Excise & Taxa·
tion Commissioner conducting the auction und~r Rule 36(22) a~d the Excise
Commissioner eXercising the functions of the F·inanical Commissioner accepting
the bid under Rule 36(22A) although they act for and op behalf of the State
Government.for raising public revenue, have the requisite authority to do so.
under the Act a;d th~ 1:ules fraoy:d. thereunder and therefore such a contract
which comes -into being a_n acceptance of. the bid, is a s.tatutori contract fal1ing
c
outside the purview of :Article 299(1)- of the Constitu'tion. In such a coritract
.
the requirements of
. Article 299(1) cannot.be
' .
invoked.
. .
[727B·El

'I A. Damodaran & 4nr. v. Staie /Jf Kera/a & Ors., [1976] 3 SCR 780;
referre~ to,
D
In the instant case, there was unconditional acceptance of· the highest bid
of the respondents by the D~puty Excise & Taxation Commissiorie~ at the time
of the auction on March 11, 1969, and also by the Excise & Ta~ation Commis-
sioner on.March 21,.1969 as required µndt!r Rule -36(22A). 'fhe respondents
could not uniJat_e1rally by their Jetter dated.April 12, 1969 r.escind the contract
on the prete'xt that the State Gove_rnment of Punjab had opened a new iiquor
shop across the State border. Evln thOugh this may have been in breach of
E
tlie inter-state ·agreenient beiween the. State Govdrninents o( Punjab and
Haryana,_ the oPening of such a liquor vend by the State Government of Punjab
could not justify the re'Spondents in not making the secu~ity deposit.' This
would not.amount to a breach of the .conditions: on the part qf the Sra1e
Government of Har.yana or furnish a ground absolving the res_IJ)ndent~ of their
liability to pay the shortfall. [7JOE-G; 7l!A-B]
F

2. Peisons who offer their bids at an auction to vend country i"iquor witb.
1- ~ full knowledge of the _terms and condi'tions attaching· thereto, carinot be permit·
ted to wriggle out of the .contractual -obligations arising out of" the acceptance
of their bids.by a pet_ition under Article226 of Constitution. [73JGJ

G
Har Shanker&' Ors.v. The Deputy Excise & Taxation Commislioner & Ors.,
(1975) S SCR 255, State of Haryana & Ors v, !age Ram & Ors., (1980) 3 SCR
746,. State of Pujab v. M/s Dial Chand Gian Chand & Co., [1931] 2 SCC 303:
referred· to.

3, (i) In a commercial Contr~ct for the performance of which a• definite H
time has peen fired and the contract spetifies the mode 9f payment. ,i.e. specifies
the dates on whiG1'1 the.·instnJments of the ·licence fee are to be paid. time is of
t.he essence of the contract. [732H]
•
• • 7.18 .SUPREME COURT REPORTS. [1984) 3 S.C.R - --(·'
(ii) Rule 36(23)(1) of the Rules specifically makes lime of the essence. It
A therefore folfows that paym·ent of the instalments On the due dates was a con-
dition pre-requisite to the performance of the contract. [733A]

In the insta~t case, the failure of the respoJitlents to make. payments relieved
thi:: State Gov~rnn1ent of their obligatioris. The Excise ·& Taxation Commis~
sioner would have been.justified if he had· cancelied the, liCence under Ruie
36(23) and put the li.t\uot venc\ to reauction for- the remaini~g peri0d of the
. financial year .. Instead of taking 'this dr~stic step of cance_llation of the 'cont- ...., ..
ract, the Deputy ~xcise & Taxatioll Commissioner served the respondents with·
the impugned notice of den1and for payment of the fi{·St fortnightly irista1ment. f
The respondents
'
w.~re
f.
Oound
•
to p'ay the defaulted instalment
.
on the
.
due date. •
. · [733B-CJ
•
c 4. The decision of the High Court in Kanhiya/a/ Bhati"a'&.Co. v. Slate of·
Haryana & Ors. has been reVersed by this Courfin State of HaryanCz v. Jage Ram
& Ors.,[1983] 4 SCC556. [720G] '·

CIYIL APPELLATE JURISDCJTION : Civil Appeal Nos. 154 & .
155(N} of 1971.

Frem the Judgment and .Order dated the I Ith November,
1969 Civil ofthe'Punjab & Haryana High Court in writ Nos. 1207
and 1607 of1969 respectively. '

. · Harbans Singh, 1.S. Gujral, C.V. Subbarao and R.N. Poddar
E for the Appellants in both the appeals .
•
G.K. Arora for the respondents in C.A. 154/71.

T.S. Munjra/ and Mrs. Urmila KaJ!oor for the Respondent in
. CA 155/1971.
F. •
The Judgment of the Court was delivere~ by
·sm~, J.· These appeals on ce"rtificate ·are
directed against the
Judgment and orders of the Punjab High Court dated November ).. .
19, 1969 allowing the writ petitions filed by the respondents and
G quashing the impugned notices of .demand for recovery of the
difference between the a·mount which they had agreed to pay under
·the terms of auction of a liquor vend and the amount realized on
re-auction of the vend a.s 8,lso. the defaulted instalments of the
licence fee payablein respect of a liquo~ vend issued under s. 60
of the Punjab Excise Act 1914 ('Act' for short).
• .~
Put very shortly; the ~ssential facts are these. On March 11,
1969, tb~ Deputy. Exdse & Taxation Collllllissioner, Hissar held an
i!ARYANA v. LAL CHAND (Sen, J.) 719
auction for granting· the right to sell country liquor for Mandi
Dabwali for the rar 1969-70 at the Colleetorate. At the commen- A
ceme!1t of the auction, the Deputy Excise & 'Taxation Commis-
sioner had read out the·auction :mnounccments and conditions of
auction as required under r. 36(4) ·of the Punjab Liquor Ucence
Rules, 1956 ('R,ules' for short). The respondents Messrs Lal Chand
Bal Rai,.ctc. offered the highest bid of Rs. 10,ll,OOO and their bid B
was provisionally accepted by the Deputy Excise & Taxation
Commissioner and they were declared to be the highest bidder as
.. required under r. 3,6(2) of the Rules. Subsequently, the bid was
· accepted by the Excise & Taxation Commissioner ·exorcising the
powers of the Financial commissioner on March ~I. 1969 as requi·
red under r. 36(22) of the Rules. The respondents however failed c
to deposit Rs. 50,550 \IS security amount as required under r.
36(22A) and thereby contravened condition No. 15(i) of the' condi- ·

' ,. . tions of auction and r. 36(2~) of the Rules .. They were accordingly
a
. served .with notice.dated April 9, 1969 by the ,Deputy Excise &
D
Tax.ation Commissioner requiring them to show cause why the
licence for country liquor vend, Ma!ldi Dabwali should not be put
to re-auction under r. 36(23AJ. of the Rules and the deficiency in
price and all expwses of such re-auction recovered. from them in
the manner' laid dowh ins. l50 of the Punjab Excise Act, 1914. in·
response to the same, the respondents by their letter dated .April E
12, 1969 tried to wriggle out of their contractual obligations by
saying that before the auction.it was announced.·that no wine shop
shall be opened .within a radius of three miles of liquor vend,
Mandi Dabwali, but across the border the. State Government of
Punjab had sanctioned the establishment ofa liquor shop at village
.. Killlanwali. which was hardly 2-1/2 miles from the State border F
and this would mean that there would be two country liquor shops-·
one at Mandi Dabwali in .the State of Haryana and the other at
village Killianwali in the State of Punjab and this was in breach of
condition ~,o, !3(iii) read with r. 37(8B) of the Rules, as applicable
to the State of Haryana.. Upon this basis, the respondents repre-
G
.. sented that before requiring them to deposit the security ·amount,
·they should be given an assnrance that no· other liquor. shop would
be opened.

Although in. the show-canse noiiee, the respondents wete
intimated that in case they desired to be heard-· in person, they H
should appear before the Deputy Excise & Taxation commissioner·
a\ Chandigrah on April 14, 1969, but none of them tur~ed up on
•

720 SUPREME COURT REPORTS [i984] 3 s.c.R
A that date. On the same day, the Deputy Excise & Taxation _ y-<
Commissioner rejected the representation of the respondents and
directed re·sale of the licence for retail vend_ of the country liquor
shop at Mandi Dabwali for the year 1969-70 under r. 36(23) of the
Rules. The respondents have purposely kept back the reply that
they received frnm the Deputy ·Excise & Taxation commissioner
B conveying the rejection of their representation which intimated to
them that the licence for retail yend of country liquor shop at ,
Mandi Dabwali would be re-auctioned on April 23, 1.969 at the "' ·
Collectorate, Hissar. By his letter dated April 15·, 1969 addressed f
to all the Excise & Taxation Officers in the State, the Deputy Excise
& Taxation commissioner forwarded the notice of re-auction asking
c them to give wide publicity to the notice alo11g with the announce-
ments to be made at the time of re-auction. Copies of the circular-
letter and the notice of re-auction were sent not only to the commis-
sioner, Ambala and all the Deputy Commissioners in the State but
· also to tl~e Chief S_ ecretaries and the Excise Commissioners of diffo-
1, -
D rent States and they were also requested "to give wide publicity in
their States regarding the re-auction of the licence. At the. time of
re-auction held on April 23, 1969, there were as many as 52 bidders
and ultimately the liquor vend, Mandi Dabwali was re-sold at the
highest bid of Rs, 6,65,000 for the remaining· part of the financial
year. On May 8, 1969, the respond~nts were served with a notice
E of demand of Rs. 3,46,000 representiog the loss on re-sale .. The
High Court by the judgment under appeal quashed the notice of
demand following the d_ecision in Kanhiya Lal Bl1atia &Co. v. State ""·"f,·
of Haryana & Orsl').
The High Court following its decision in Kanhiya Lal's case,
fopra, held that the State Government had no authority to demand
F. the amounts for failure of which the vends were pot to re-auction·
on the ground that the licence fee l_evied was in the uature of
excise duty. Recently, this Conrt has in State of fiaryana v.
Jage Ram & Ors.(') reversed the decision of the High Court in
Kanhiya Lat's .case, supra, and held that the amo.unts which the State "- '
· Government had charged to the respondents were neither in the
,G nature of a tax nor in the nature of an excise duty but were.in the
n·ature of a price. wl;ich- the State 'Government were entitled'to
charge as .consideration for parting with its privilege·in favour of
the .licensees. That being so,the appeals must succeed on this short
ground alone. Normally, this would have entailed remitting the
H writ petitions to the High Conrt for a decision on merits but looking >-
(1) CW. No. 343of1969 decided on July 23, 1969.
(2) ll98Jj4 s.c.c. 556.
.
HARYANA v. LAL CHAND (Sen, J.)
. 721
to the fact. that the demands raised were for the financial year
1969-70,we felt that no useful purpose would be served in remitting A
the matter to th; High Court and heard the parties on merits.

Apart from the question of. validity of the charge which is
co'lnmon to both the appeals, the. questions raised in the two appeals
arc distinct and separate and they will have to b<; dealt with
separately .. B

It is convenient at this stage to set out the relevant statutory
provisions. s.27 of the Punjab Excise Act, 1'914 empowers the State
Government to"lease' no such conditions and for such period as it
may deem fit the right of selling by wholesale or retail any country ' c
liquor or intoxicating drug within any specified local area. .On said
lease being granted the Collector, under sub-s.(2J thereof, has to
grant to the lessee a licence in the from ofa lease. S.34 of the Act
provides inter a/ia that"(!) Every licence gra·nted under the Act shall
be subject to payment of such fees, if any, as the Financial Commis-
sioner may direct ; and (2) The authority granting such licence may D
.. r.equire the ltcensee to give such security for the. obser~ance of the
terms of his licence, or to make such deposits by way of security.
as he may think fit. s.5£(1) of the Act confers power on the State
.Government, by notification, to make rules for the purpose of carry-
ing out foe provisions of the A<f In particular and without prejudice
to the generality of s.~8(1), sub-s. (2) thereof provides that the State E
Government may make- rules with respect to matters enumerated
therein. Under .cJ.(f) the State .Government may make rules regula-
ting the manner of holding auctions of liquor shops. S.59 provides
that the Financial Commissioner may, by notification, make rules
by d. (a) lo regulate the manufacture, supply,·. storage or sale of
F
any in toxic.ant, cl.(d) prescribing the scale of fees or the manner of
· fixing fees payable in respect of. any. such licence and by cl.(f)
• ·prescribing the authority by, the restrictions under, and the condi-
tions on which, any licence may be granted. The licences, in a
large measure, owe their existence to the rules framed by the
Financial Commissioner under S.59. S.60 of the Act, insofar as G
\
material, reads :

"60. (I) Recovery of dues-The following moneys namely:-

(a) all excise revenue ;
n
(b) .• * •••••.• •
722 SUPREME COURT REPORTS (1984) 3 S.C.R -- '(' .
(c) all amounts due to ihe Government by any person
on account of any contract relating to the excise
reven~e;

may be recqvercd. from the person primarily liable to pay
the same, or from his surety (if any), by distress.and sale of
his· moveable property or by any other process for the
B recovery of arrears of land rcve1\ue due from land· holder&
or from farmers of land or their mreties."

The Punjab Liquor Licence Rules, 1956 framed by the Finan-
. cial Commissioner in exercise of his powers under s.59 of the Act.
make detailed provisions regulating(.• the manner -in which a licence
G tor the retail venJ or country liquor shall .be grarited by public
auction, and the conditious to which it shall be subject. R.36(22A)
of the Rule provides that a person to whom a country liquor shop
has bee!' sold shall deposit by way of security an amount equivalent
to one-twenty-fourti1 of the amount of licence fee determined under
.r.36(16) within a period· of seven days of the date of auction.
D ,. . '
R.36\23)(2) provides tliat a persun to whom country liquor shop is
sold shall pay the amount of licence fee so, calculated in 22 equal
instalments, each instalment being paya'ble.on tho 10th and 26th of
each month sfarting from the month of April. In the event of
failure to pay the instalment by the due date, his Hcence may be
E cancelled.- R.36(23A) interdicts that any person whose bid has been
accepted at the auction Jails tJ make the deposit of the amount of
security equivalent to one-twenty;fourth of the total licence fee as
required under r.36(22A), the Collector ·may resell the licence by
public auction and deficiency in licence fee .and all expenses for
such resale· shall be recoverable from (he _defaulting bidder in the
F "manner laid down in s.60 of the !'unjab.Excise Act, 1914;

In Har Shanker & Ors: v. The Deputy Excise & Taxation •
Commissioner & Ors.,\') this Court held that the writ jurisdiction of
the Hinh Courts under Art.226 was not intended to facilitate avoi-
dance ~f obligations voluntarily incurr~d. It was· observed that one
G
of the-important purpose of selling the exclusive right to vend liquor
in wholesale or retail is_to raise revenue. The licence fee was a
price for acquiring such privilege. One who makes a bidfor the
orant of such privilege with a full knowledge of the terms and
~onditions attaching to the auction cannot be permitted to wriggle
H
(I) (1975]3 SCR 255
' .
HARYANA "·LAL CllAND (Sen, J.) 723
out of the contractual .obligations arising out of the acceptance of
his bid.. Chandrachud, J. (as he then was) interpreting the provisions
of the Punjab Exci.se Act, 1914 and of the Punjab Liquor Licence A
Rules, 1956 and speaking for the Court, said:

"The.. announcement of conditions governing the
auction were in the nature of an invitation to an offer to
.those who were interested in the·saleof country liquor. The B
bids given in the auction~ were offers m.ade by the prospec-
tive vendors to the Government. The Government's
acceptance of those bids was the acceptance of willing
offers made to it. On such accepta1ice, the contract between
•. the bidders and the Government became concluded and a 0
binding agreement came into existeuce between them.
•• •• ••
The powers of the financial c·ommiss_ioner to grant liquor
licence by auction and to collect licence fees through the
medium of auctions cannot by writ petitions.iJe questioned
D
by those who, had thoir vendure SUfceeded, would have
relied upon those very powers to found a legal claim.
Reciprocal right and obligations arising out of contract do
not depend for their enforceability upon whether a contract-
. ing .Party finds it prudent to abide by .the terms of the
contract. By such a test no contract could ever .have a E
binding force."

· To the same effect are the decisions of this Courtin State of
Haryana & Ors. v. Jage Ram & Ors.(1) and the State of P1in}ab v. M/s
Dial Chand Gian Chand & Co. 12 > laying uown that persons who offer F
their bids at an auction lo vend country liquor with full knowledge
of the terms and conditions attaching thereto, cannot be permitted
to wriggle out of the contractual obligations arising out of and accep-
• tance of t~cir bids by a petition under Art. 226 of the Constitution.
The. observations· in Har Shanker's .case, supra, ·did not
G
touch. upon the questioh . whether such a contract must be. in
complian~e with Art, 299 (I) of the Constitution, The question
·whether the process of licensing by public· auction of liquo~ vend •
involves a contract at al\ or is merely the. grant of a · privilege and
the bidding at a public auction is with _a .view merely to .fix the
pnce for the purchase of the privilege, has been en.gaging the B
. . •
(1) [1980] 3 SCR 746.
(2) [19831 2 sec 503.
•
SU~REME COURT REPORTS (1984] 3 S.C.R._..,
attc~tion. of the . High Courts for· quite some time. In Smt.
Nanhibai v The Excise Commissioner, M.P. & Ors.(1) the Madhya
Pradesh High Court held ihai ·the. State _Government .has the
exclusive privilege of manufacturing, selling and possessing in-
toxicants which it has power to lease for consideration under i8 s:
B of t·he !\1.P. Excise Act, 1915 and that every • auction of excise
contract for
sale of intoxicants is a leasing of the Government's
right of selling intoxicants. P.V. Dixit; C.J .. speaking for the •
Court made following observations on. this point ·which are _,.
•.'
pertinent : ·'

"The principle that the State Government has exclusive
c right of manufacturing, selling or possessing intoxicants . or •
any country liquor intoxicating drug runs through. ss. 13
·to )8 of the Act.
•••
D
••
.The important••condition that must
••
be.satisfied before
any licence. can be granted to a person for manufacture or
' .
sale of any country liquor intoxicating drug is that the
person must first obtain the privilege or the right of
manufacturing or selling the intoxicating drug .
** •• •• ••
In every auction sale of a liquor shop at which liquor
is sold in wholefale or retail, there is a sale of the lease
of the Government's right of selling country liquor
intoxicating drug.· On the acceptance of a bid of a person
F
at an auction sale, a contract . for the- demise· of the
Government's .interest is brought into. exist"'1ce and this
is followed by the grant ofa licence to the person· whose
bid has been accepted."

These observations of t1~e learned Chief Jtistice have sine~
•
G
been approved of by a Full Bench of the High Court in Ram
Rattan Gupt~ v. State of M.P.( 2 ) The other•two cas~ on the point.
which we must notice are : Ajodhya Prasad Shaw &. Anr. v. State
·• of Orissa & Ors.(3> and M/s Shree Krishna Gyanoday Sugar Ltd. &'
Anr. v. State of Bihar & ·Anr.('! ' ·
ff
.• (I)A.I.R. [19631 M.P. 352.
(2) A.LR. [1974] M.P. 101. •
(3) A.J.R. [1971] Ord. 158.
(4) A.LR. [1975] Pat., 123 •.
·HARYANA v. LAL CHAND {Sen, J.) 725
In A,iodhya Prasad Shaw's case, the Orissa High Court and
in. M/s. ·Shree Krishna Gyanodaj"s case, th'e Patna High Court A
interpreting like provisions ofthe·Bihar & Orissa Excise Act, 1915
held that where the State Government in exercise of its powers·
unde~ s .. 22 of that Ac.t grants exclusive p~ivilege to ·any perso~
on certain conditions under s. 22 (I) and a licence .is received. by
that person under s. 22 (21, it cannot fo contended that· it amounts
B
. to.a contractniade in exercise of the executive power of the State
· within the meaning of Art. 299 (!)of the Comtitution. R:N. Misra,
· J. speakin'g for the Court in Ajo1ihya Prasad Shaw's case tried
to highlight the problem in these words:
c
"Law. is well settled and parties before us do not seek
to .canvass that this constitutional requirement' is not
mandatory. In the field it covers it is a pre-requisite to
bring into existence a vaiid contract. The question for
examination in the present case is, however, different. Is·
there a contract at all and in case it involves a contract is it D
one purported to· be made in exercise of tne executive
power of the .State Government is the question for exami'.
.n?-tion."

The learned Judge went on to say :
E
"In case t\1e result of our inv~stigation is that it is not
a contract in exercise of the executive power of the State in
terms of '.he language used in the Article, it would· follow
that this constitutional requirement has· no application. I
have already indiciitcd that the settlement of the shop, the
collection of the fee and the grant of the licence are all
statutory acts by the prescribed authority. The intention of
the Constitution is not to extend the principles in Art. 299
(!)to cover all possible contracts. This is why specific
< t "...<.
teference has been made to contracts "in exercise of tbe
executive power". It ·1s not necessary for the present (
purpose to examine whether the licensing process involves
a contrnctu~l agreement. Possibly there is an element of
contract in the settlement, but certainly it is noi one
entered into in the executive power of the State but is .
regulated by the statute or the rules made thereunder. Jn
the circumstances in the case of a statutory licence even ·
based upon 'a contract the requirements of this Article can-
not be invoked."
726 SUPREME COURT REPORTS (1984) 3 S.C.l\.

A In M/s. Shrce Krishna's case, supra, !'LP. Singh, J. speaking
for the Court rightly observed that when the State ·Govern-
ment in exercise of its powers under s 22 of the. Act grants
. tlie ex.elusive privilege of manufacturing, or supplying or selling
any intoxicant like litjuor to any person on certain condition, there .
comes into cxis:once a contract m~de in exercise of its statutory
B powers and such a contract does not 9mount to a contract made by
the State in exercise of the executive powers.

There is a distinction between. contracts which are execµted
in ex'1'.cisc of the qecutive powers and contracts which are
statutory in nature. Under Art. 29,9(1), three conditions have
c to be satisfied before a binding contract by the Union or the
State in excercise ·of the executive. power comes into existence:
(I) The contract must be expressed to be made by the President or
the Governer, as the case may be. · (2) It. must be executed in.
wntmg. And (3) The execution thereof.should be. by such person
D and in such manner as the Presid.ent or; the'Govenor may direct or .
authorize. There. can be no doubt that a contract which has to be.
executed in accordance with Art. 299(1) is nuilified and becomes
void if the contract is not executed· in conformity with provisions of
Art. 299(1) aud- there is no question ·of cstoppel or ratification in
swh case,s. Nor ca.n there be ·any implied co!1tract between the
·E Governmet and another person : K.P. Clzowdhmy v. Srate of M.P.,('J
Mulmnchand v. State uf M.P.,( 2! State of M.P. v. Rattan La/(3) and·
State of M.P. v. Firm Gobardhan Dass .Kai/as/I Nath,\4!

It is well settled thafArt. 289(1} applies to a contract made in
exercise of the executive power of the Union or. the State, b.ut not
F to a contract made in exercise of statutory power, Art. 299(1) l1as
no application to a case where a particular statutory -authority as
. distinguished from the Union or the States enters into a contract
·which is statutory in nature. ,Such a contract, even though it is. for
securing the interests of the Union.or the States, is not a c"ontract
'
~ ..
G which has .been entered into by or on behalf of the Union or the
State in ~xercise of its executive powers. In respect of forest con-
tracts which are deal( wifa. by this Court i11 K.P. Chowdhary's,
M ulamchand;s, Rattan-Lal' s and Firm Gobardhan. D/Jss' s cases, supra,

H (I) [1966) 3 S.C.R. 919
(2) (19681 3 s~c.R. 214
(3) 11967) M.P.L.J. 104
(4) A.J.R. [1973] S.C ..1160
HARYANA v. LAL CHAND (Sen, J.) 727
there are provisions in.the Indian Forest Act, 1927 and the Forest
Contract Rules framed thereunder for entering into· a formal deed .
between the forest contracter and the State ·Government .to be·
executed aud expressed in the name of the Governor in conformity
with 'the requirements of Art. 299(1), whe.-eas unde1: the Punjab
Excise Act, 1914; like some other State Excise Acts, once .the bi.d
·offered by a person at an auction-sale is accepted by the authority
B
' ., . ·competent, a completed contract comes into existence and all that
~ is required is the grant, of a licence to the person whose bid has
been accepted. It.is settled law that.contracts made in exe:cise of ·
statutory powers are not covered by Art. 299(1) and. once this dis-
tinction i's kept in view, it will be manifest that tlie principles laid
down in K.P. Chowdhary's, Mulamchand's, ·Rattan Laf's· and Firm c
Gobardhan Dass' cases are not applicable to a statutory contrah.
· In such' a case, the Collector aeting ·as the Deputy Excise &
Taxation Commissione~ conducting the auction under r. 36(22) and
1 the Excis.e Commissioner exercising the functions of the financial

,Commissioner acceptillg the· bid under r. 36(22A) although they
undoubtedly act for and on behalf· of the 'state Government for D
raising public revenue, they have the requsite authority to do so
under the Act and the rules framed thereunder and therefore such
a contract wliich comes into being on acceptance of the bid, is a
statut9ry contract failing outside the purview of Art. 299(1) of the
Constitution.
E

We are clearly of the opinion that in the case of a statutory
contract like the one under the Excise Act,. the requiremf!nts of Art.
299(1) cannot be. invqked. In A. Damodaran & Aur. v. State of
Kera/a & Ors<•!., the Court interpreting s.28 of the Kerala Abkari }l
Act, 1967.which was in pari materia with s.60 of the Punjab Excise ·
Act,. 1914 he.Id th(!t even if no formal deed had been executed as
required under Art.299{1), ·still the liability for payment of the
balance of the licence amount" due could ):le enforced by taking
recourse.to s.28 of the Act. The Kera\a · High Court rejected· the·
contention of the appellants by holding that the li\bility to satisfy G
the dues arising out of a bid was enforceable uncler s.28 quite apart
from any contractuai' liability and this view was upheld by this C,ourt
on the ground that the word 'grantee' in s.28 has a wide'.connota:tion
to mean a person who had been.granted the privilege by acceptance
of his bid. It was further held that the· stat\ltory duties and liabiJic Q

(1) [1976) 3 S.C.R: 78Q.
728 SUPREME COURT REP.ORTS (1984] 3 S.C.R,
ties arising on acceptance of the .bid at a public a\lction of a liq\lor
contr<1ct may be enforced in accordance with the stritutory provisions
A
a~d that it was !lot a condition precedent for the ;ccovery of an
amount due under s.28 of the Act, that the amount due and
recoverable shoufd be under a formally drawn up and executed
contract.. This is in recognition of the principle that the provisions
of Art.299(1) of the Constitution are not attracted to the grant of
B. . such a privilege to vend liquor under the A'.ct.

In Kishori Lal Minochu's case, supra, there was reauction of a
liquor vend on the highest bidder's failure to deposit one-sixth of the
bid amount as security deposit and the question was whether the
S~ate.waserititled to recover in a suit the deficiency on reauction.
The ·decision. in Minocha's case Is clearly distinguishable fqr two
reasons : first, there was nothing to show that the bid had been
accepted by the Excise Commissioner·under r . .359(2) of the U.P.
Excise Manual. Further, r. 357 under which the exCise authorities
,put the vend to reauction -had not be~n published in the official
gazette as requlred by s.77 of the U.P. Excise Act, 1910 and thus had
I)
no statutory force.< No such question arises in these cases as. the
liability that is sought to. be enforced against the respondents by the
impugned notices of .demand is a statutory liability in terms of condi-
tion 150).ofthe conditions of auction read with r.36(23) of the Rules
and the amount is recoverable from them in .'the manner laid down
in s.60 of the Act.
•
The short question that falls for determination in these appeals
is whether the State Government was entitled to realise the difference
which the respondents had agreed to .pay under the terms of auction
of a liquor vend and the amount re.alized on reauction of the vend,
as also the defaulted instafment o(the licence fee payabie in respect
. of a liquor vend. The first of these questions arises fn Civil Appe.al
No.154(N) ofl971 while the second in Civil Appeal No.155(N) of
1971. y/e will deal with them in that order.

•
CivU Appeal.No. 154.(N) of 1971

There is no substance in the contention that the respondent
were not served with a notice under r.36(3) of the Rules. The date
of reauctiori was fixed by the ·Excise & Taxation Commisaioner under
r.36(2) .. On fipril 14, 1969, the Deputy Excise & Taxation Commis· ...
sioner rejected the representation made by the respondents and
directed resale onhe licence for retail vend of cou11try liquor shop,
HARYANA v. LAC CHAND (Sen, J.) 729 '
Mandi Dabwali for the year1969.-70 .. It is accepted before us that A
the D.eputy Excise & Taxation Commissioner had conveyed to the"
• respondents that their representation had been rejected and that the
licence for retail vend for Mandi Dabwali shop would be reauctioned
. on April 23, 1969, at the Collectorate, Hissar. The respondents have
withheld the document and an axlverse inference ·must necessarily be ·B.
• drawn against them. It is quite obvious that the respondents were
;·du1¥ given notice of re-auction as under r.36(3). It is evident fr9m
the return filed by the State Government that copies of circular letter
dated April 15, 1969 by the.Deputy Excise & Taxation Commissioner
and the notice of re-auction of even date issued by him were sent. c
not only to the Commissioner, Ambala but to all the Deputy Com-
0 •
missioners as well as to all the Ex cise & Taxatiop Officers in the
State but also to tbe· Chief Secretaries and the Excise Commissioner
of different State. From this, it is quite apparentthat wide publicity
A ) was given throughout. the State of Haryana as well as in other States
' regarding the date and place of re.auction as. enjoined by r.36(3) of D
the Rules. · As. already stated, there were as many .as 52 bidders
present at the time of re.auction. The decision in Jage Ram's case,
supra is clearly distinguishable on facts. There, the Court on a
consideration of the material on record found that there was no
substantial compliance either in the letter or in spirit with the E
. requirements of r.36(3) oft~e R1.1Ies. Since the re-auction in that
case did not conform fo the rules,. the Court held that the defanlting
""!""f-- · bidders could not be held liable to make. good the difference between
the amount which was payable by them and the amount which was
fetched at the re-auction. The principle laid down in Jage Ram's F
case, sµpra is clearly npt ~ttracted in 'the facts and circumstances of
the prhent case. The first contention regarding the invali.dity of re-
auction held on April 23, 1969 based on r.36(3) of the Rules must
therefore· faiL

' G
Equally fntile is the contention that the respondents had with·
· drawn their bid and therefore they could not.be mulcted for the
difference between the amount which they were liable to pay and the
amount realized 'by re-sale of the vend. This is not a· case. of the
type reported in Union of India & Ors. v. M/S. Bhim Sen Wa/ait:
Ram(') which laid down. the well-settled:·princip\e tftat an offer can
always be withdrawn before it is finally accepted and that a condi-
tional acceptance is not an acceptance in law. In Bhim-Sen Wa/aiti 11

(1) [1970) 2 SCR $94,
(30. SUPREME .COURT REPORTS . [1984] 3 S.C.R •

.Ram's case, supra, the Court held that.the contract of sale was not
complete till the bid was confirmed by the Chief Commissioner and
till snch confirmation the person who.sc bid had ·been provisionally ·
accepted was entitled to withdraw his bid and that when the bid was •
withdrawn before the confirmation of the Chief Commissioner, the
bidder was not liable for_ damages on account of any breach of
B contract.or for the shortfall on the re-sale. It was observed:.

'·lt is not disputed that the Chief, Cmnmissioner .has
disapproved the bid offered by the respondent. If the Chief
Commissioner had granted sanction"under ·cl.33 of Ex. D-23
the auction rnle in favour of the respondent would have been
c a completed transaction and he would have been liable foraliy
. shortfall .on the resale. A~ the essential. pre-requisites bf a
completed sale are mifsing in this case there is no liability
imposed on th~ respondent for payment of the .deficiency in
· the price."
D
·It is luged on the strength of these observations that the res~
pondents were entitled to withdraw their bid by declining to make
the security deposit. The contention cannot be accepted. For
onething, this was not a ·case where there was .mere co.nditional
acceptance of the highest bid _of the respondents by the Deputy
E . Excise .& Taxation Commission.er at the time of the auction on:
March. 1; 1969, but their bid .was also· accepted by the Excise &
Taxation Cotnmissioner on March 21, 1969 as required under r.
36(22A).

F The responoents could not unilaterally by their letter da\ed
'April 12, 1969 rescind the contract on the pretext that the State
Government of Punjab hud opened a new· liqu~r shop at village
Killianwali across the State border whfoh was contrary to condition
·No. l3(iii) ~f the conditions of auction read with r. · 37(8B) of th~
Rules. Even though this may have ·been in breach of the inter-
G s·tate agreement between the State Governments of Punjab and
Heryaria, the opening of such a liquor vend by the State Govern-
ment of Punjab at village KHiianwalicould not justify the· respon-
dents in not maki11g the secu.rity deposit of Rs·. 50,550. It appears
from the roturn filed by the State Government that although condi-
H tio~ No.13(iii) had been read out. before the. auction began as
required under r. 36(4), there was no mention that there was an
jnter-State a~reement between the two State Governments ~nd tha\
HARYANA v. LAL CUAND (Sen, J.) 731
it was a condition of sale that the Slak Government of Punjab
A
would not open a liquor vend within a radius of three miles from
the State border. Nor would this amount to a breach ~f the· con-
..· ditions on the part of the State Government of Haryana or furnish
a ground absolving the respondents of the\r liability to pay the
~ • shortfall. The second contention that the respondents had with-
.
' drawn their bid and were therefore not liable for the loss on re-
,\ auction or"liquor vend at Mandi Dabwali cannot be sustained.
B

In Har Shanller's case, supra, this Court held that the writ
jurisdiction of the High Courts under Art. 226 was not i_ntended to
facilitate avoidance of obligations voluntarily ·incurred. It was
. observed that one of the important purposes of selling the exclusive 0
right to vend liquor in wholesale or retail is to raise revenue. The
licence fee was a price for acquiring such privilege. One who
~ ,• makes a bid for the grant.of such privilege with full knowledge of
the terms and eonditions attaching to the auction cannot be permit-
ted tQ wriggle out of the ·contractual obligations arising out of the
.acceptance of his bid. In dealing with the question, Chandrachud,
D
J. said :

"The pow.ers of the Financial Commissioner to grant
liquor licences by auction and !o collect licence fees.
through the medium of auctions cannot by writ petitions E
be questioned by those who. had their venture succeeded,
would have relied upon those very powers to found a legal
claim. Reciprocal° rights and obligations 'arising ~ut of
contract do not depend. for their enforceability upon
whether a contracting party finds it· prudent to abide by
. the terms of the contract. By such a test no contract could F
eve11 have a binding force." ·
' ;... To the same effect are the decisions of this Conrt in State of
Hai yana & Ots. v. Jage Rame & Ors(l). and the State of Punjab
v. M/s. Dial Chand Gian Cha.nd & Co.( 2} laying down that per-
G
sons who· offer their bids.at an auction to vend country liquor
with full knowledge of the terms' and conditions attaching thereto,
. cannot be permitted to wriggle out ·of the contractual obligations
arising ouf of the_ acceptance of their bids by a petition under Art .•
226 of the Constitution.
H
(I) [ 1980] 3 SCR 746.
(2) [t983l 2 sec so3.
,

- ·{" ..
732 SlJPREM,E COlJRT REPORTS [1984) 3 S.C.R -

Civil Appeal No. 155 (N) of 1971
A
At an auction for the licence of retail vend for.Butaila in the
. Rohtak district for the financial year 1968-69 held by the Deputy
Excise & Taxation Commissioner on March 11, 1968 at the Collec-
torate, Rohtak, the respondents Messrs Ram Kishan Pritiam Singh
B & Co. offered the highest bid of Rs. 1,40,000. The Deputy Excise ..
& Taxation Commissioner accepted their bid at the conclusion on the
auction. On the same day, the respondents deposited Rs. 5,~11 equi-
valent to one-twentieth of the licenc.e fee repres!'nting the security
amount and started operating the said licence w.e.f. April 1 1968.
It appears that they drew their supplies by making applications to the
0 Excise & Taxation Officer, Rohtak for the issuance of challans for
deposits of still-head duty in the treasury, and after crediting into
the tr~sury a sum equivalent to the excise duty payable on the.
stre·ngth of permits issued by him. Admittedly, the respondents
worked the contraet throughour the . period without making any
D payment of Rs. 1,40,000 towards the'licence fee which was payable
in 23 fortnightly instalments. · The respondents on being served
with a notice of demand for payment of Rs. 13,000 representing the
first of such fortnightly instalmants filed a writ petition in the High
Court and the High Court following its decision in Kanhiya Lal's
ca.se, supra, struck down the notice o( demand. It is accepted at the
E bar that the respondents have not paid anything towards the licence
fee ·of ~s. 1,40,000 due and payable by them.

Upmfthese facts, the Excise & Taxation Commissioner would
have been justified in!cancelling1(the licence-in terms of r.36(23)(2)
of the Rules which is' in these terms :
F
"A p,erson to whom a country spirit shop is sold shall
pay the annual licence fee in 23 equal instalments, e.ach
...._'
instalment being payable" on the 10th and 26th of each
month starting.from the month of April. In the event of
G failure to pay the instalment by the due date, his licence
may be cancelled."

There was a fundamental breach of an· essential condition by
the respondents. In a commercial contract of this nature, for the
H performance of which a definite time has been fixed arid the contract
specifies the mode of -payment i.e. specifies -the dates on which the
instalments of the licence fee are to be paid, time is of the essence
•

HARYANA v. LAL CHAND (Sen, J.) 733

of the contract. R .36(23)(1) of the Rules specifically makes time A
of the essence: It therefore follows that payment to the instalments
on the due dates was a condition p~e-requisite to the performance
of the contract, and that ·the failure of the respondents to make
such payments relieved the State Government. of their obligations.
The Excise & Taxation Commissioner would therefore have been
justified if he had cancelled the licence l!nder r. 36(23) and put the" B
liquor vend to reauction for the remaining period of the financial
year. Instead of taking this drastic step of fancellation of contract,
the Deputy Excise & Taxation Commissioner served the respondents
with the impugned notice of demand for payment of . the first
fortnigtly instalment of Rs. 13,000. The respondents ·were bound ·
to pay the defaulted instalment on the due date but without comply-
c
ing .with the notice of demand moved the High Court under Art.
226 of the Constitution challenging the demand on the ground that
the licence fee partakes of ihe nature on an excise duty. As already
stated, the High Court following its decision in Kanhiya Lal's case
struck down the notice of demand. The result has been that the D ..
respondents enjoyed the privilege of retail vend of country liquor,
Butana for the entire p~iod without payments of any licence fee. On
merits, learned counsel appearing for the respondents had nothing
to urge against the impugned notice of demand. 4

The result therefore is .that the appeals succeed and are allowed E ,
with costs throughout. The judgment and orders of the High Court
dated November 11, 1969 quashing the impugned notice of demand
served on the respondents are set aside and the writ petitions filed
by the respondents are dismissed.
F

N.V.K. 4ppeals allowed.