Classification Of Private & Public Companies In Excise Rules For Exemption From Payment Of License Fee Is Ultra Vires The Constitution: Calcutta High Court

The Calcutta High Court has recently directed the West Bengal State Excise Department to refund a sum of approximately Rs 92 lakhs to the Kenilworth Hotel Private Limited, which were levied as excise fees for 'change in management' upon the death or retirement of a member.

In striking off the 'unconstitutional and discriminatory provisions' under the Excise Rules, which allowed for the levy of such fees from only private companies and not public companies, a single bench of Justice Moushumi Bhattacharya held:

The intention in the present case is to ensure the level-playing field guaranteed under Article 14 of the Constitution in terms of treating a Private Limited Company on an equal plane; specifically when the basis for creating a distinction for the required purpose is found to be absent. The sum of Rs. 64.50 lakhs which was paid and the further sum of Rs. 5.5 lakhs, which was paid subsequent to filing of the present writ petition, aggregates to Rs. 70 lakhs. This amount should be refunded by the respondent authorities to the petitioner. Petitioner has already paid the amount of Rs. 22 lakhs demanded by the Collector of Excise, Kolkata (South) in a revised notice. The respondents shall hence refund the amount of Rs. 22 lakhs to the petitioners within a fortnight from the date of this judgment.

Brief facts

The Court was seized of a plea by Kenilworth Hotels, the petitioner, challenging Clause (d) of the proviso to Rule 5 of the West Bengal Excise (Change in Management) Rules, 2009.

The petitioners sought for the aforesaid clause to be declared ultra vires the Constitution of India and for quashing demands made by the Excise authorities under the aforesaid rule. Petitioners also sought a refund of the money deposited to the excise department pursuant to these demands. 

Petitioner was the owner of Kenilworth Hotel, which was a 4-star hotel, incorporated in Kolkata in 1970, which was a private limited company under Section 43A(2A) of the Companies Act. 

The respondents had sought information regarding the name change of the petitioner for the excise license since it had been changed to New Kenilworth Hotel Private Limited from New Kenilworth Hotel Limited.

In pursuance of their reply, the petitioner received a demand notice of Rs 22.5 lakhs from the excise department as fees towards change in management and in status of the Excise License from New Kenilworth Hotel Limited to New Kenilworth Hotel Private Limited and for the induction of new directors.

It was alleged that respondents did not consider any counter-representations made by the petitioners and directed them to pay further sums of money in response to the demand notices issued by the department. 

Petitioners approached the High Court, which disposed of their plea by setting aside the direction of the excise commissioner and directing the appellate authority to give the petitioners a fresh hearing subject to them depositing Rs 20 lakhs. 

Upon hearing the petitioners, the excise commissioner passed the impugned order holding that the petitioners would be liable to pay the fees as stipulated in the rules, and issued a fresh notice demanding a further payment of Rs 22 lakhs.

Proceedings before the High Court 

Petitioners argued that a change in the board of directors in the usual course of business did not amount to a change in management and that such circumstances did not result in needing to apply for a new excise license under the 2009 rules. 

It was submitted that while these fees were levied upon private companies, they exempted public companies and that this distinction was not based in any intelligible differentia and did not have any rational nexus to the object sought to be achieved, rendering it ultra vires the constitution.

Petitioner desired the law to be read up to include change in management in the usual course of business in a case of a private limited company in the same manner as clause (e) to the proviso to Rule 5(1) of the Rules.

Respondents, on the other hand, argued that the difference afforded to private and public companies emanated out of the distinction in the corporate laws of India. 

It was submitted that the expression “change in management” had been clarified through government circulars. Notification issued by the Finance Department of the State on 11.2.2020 sought to amend Rule 3 of the 2009 Rules and that the said amendment is by way of substitution of the original Rule 3 whereby the meaning of “change in management” stands crystallised, it was submitted.

Substitution of director does not amount to change in management

Upon noting the arguments of the parties, the Court looked at whether the substitution of a director on the Board amounts to a change in management, and whether the impugned clause under the excise rules offends the petitioner's fundamental rights under Article 14 of the Constitution. 

It found that the changes in the Board of Directors in the usual course of business does not amount to “change in management,” and that appointments to the board of directors cannot be equated to a change in management. 

In other words, a “change in management” of a Company should be of a nature so as to determine the ordinary Excise License in terms of Rule 4(2) and result in a “proposed transferee” in terms of Rule 4(3).The usual fitness and eligibility criteria for holding an excise license would come with consideration only after there is a structural change in the company, it held.

Clause making distinctions between public and private limited companies for payment of license fees is ultra vires the Constitution

Finally, in holding that the classification between public and private companies under the impugned clause of the excise rules was not based in intelligible differentia with a rational nexus, the Court found that carving separate provisions out for the first time in Rule 5(1) and the proviso thereto is unreasonable and without the support of the Rules themselves.

Therefore, the differentia made for classifying Private and Public Limited Companies under two separate groups under clauses (d) and (e) of the proviso to Rule 5(1) does not have an intelligible basis. The differentia for the classification do not also have a rational nexus to the object of the 2009 Rules, the Court held. 

It was further held that the aforesaid clauses violated the constitutional guarantee of 'equality among equals' under Article 14, by creating two separate groups/classifications for exemption from payment of license fee, and was thus ultra vires the constitution. 

Accordingly, the impugned proviso was declared unconstitutional, and the Excise department was directed to refund the money they had collected from the petitioners. 

Citation: 2023 LiveLaw (Cal) 342

Case: New Kenilworth Hotel Private Limited and another v State of West Bengal and others

Case No: WPA 4873 of 2018