Can A State Running Lottery Ban Lotteries From Other States? Supreme Court To Consider

The Supreme Court on Tuesday issued notice to the State of Kerala on a Special Leave Petition filed by the State of Nagaland challenging the Kerala High Court's order which upheld the power of the State Government to regulate lotteries from other states.

A bench comprising Justices KM Joseph and Hrishikesh Roy was hearing the challenge against the judgment delivered by the High Court on May 17, 2021, which upheld the amendments brought to Kerala Paper Lotteries (Regulation) Rules in 2018 (Rules) to regulate marketing and sale of lotteries organised by other states in their own State.  

Solicitor General of India Tushar Mehta, appearing for Nagaland, highlighted that the issue broadly pertained to the interpretation of the Lotteries (Regulation) Act, 1998 (the Act). At the outset, SG Mehta submitted that lotteries organised by the State governments and the Central government fell under the ambit of Entry 40 of List I and therefore the Parliament had exclusive control over the same. He then highlighted the relevant provisions of the Act and stated that Section 5 of the Act provides that States can prohibit the sale of tickets of a lottery organised, conducted or promoted by other States. He relied upon the judgement of B.R. Enterprises v. State Of U.P. (1999) for the same. 

Justice Joseph orally remarked that he personally had his own views on the judgement of B.R. Enterprises (supra) which held that the state cannot ban other states' lotteries, unless it banned its own lotteries. To this, the SG urged that he may be able to convince the bench that the law laid down in B.R. Enterprises was the correct law. He stated that–

"Otherwise, you cannot cut competition...Ultimately, the state is in the field of competition. Lottery is a (form of) trading Under Article 286."

The bench stated that the only justification for a state to organise and sell lotteries was to garb revenue generated from the same and to provide employment to the agents that sell lottery tickets. In this context, the bench remarked, that if a state says that it would only allow the lottery tickets of their own state under Section 4 of the Act, and ban tickets from all other states, the result would be that the lottery tickets of that state will generate maximum revenue for it but no other states would be able to generate revenue. The court elaborated upon the same and stated that–

"It is a source of revenue...Even the court (in B.R. Enterprises) did not accept the argument under 3(1)...They read down the provision which is clear as daylight. The provision is your own creation. It is the Centre's creation. Law is made by you...Section 5 says that the State may ban lottery organised by another State...Section 5 as made by you is very clear that the State can organise lottery under Section 4 and Section 5 says that it can ban lottery in another state."

The SG stated that as per his understanding of B.R. Enterprises, it was difficult to maintain legality or constitutionality of Section 5 as it was presented and therefore, the court said saved the provision by reading it down. Thus, he asked for a detailed bi-parte hearing of the matter.

The SG submitted, that in case of any violations remedy lied under Rule 5 and States cannot do something indirectly what was prohibited directly. 

The bench remarked that the States could not become "mute spectators" and that it was "immoral" for the State to say that they had no duty. It noted that as per the executive power under Article 162, the State had to issue guidelines in place of the (Kerala Paper Lotteries (Regulation)) Rules and figure out how it would discharge its duties under Rule 5 of the Central Rules, that is the Lotteries (Regulation) Rules, 2010. 

The SG submitted that the same could not be done by state and could only be done by the centre. Further, he stated that the violation of the same could only result in a complaint and suspension by the Centre. He cited Rule 5 of the Lotteries (Regulation) Rules, 2010. He stated that Rule 5 herein provided that if there was any violation by an organising state, the State shall bring the notice of the details of such violations or irregularities to the Central Government. Under 6, he stated, the Central Government had the power to even suspend the operations of such a state. 

The court noted that even for the purpose for performing duties under Rule 5, there had to be a method. It noted that the same could not be done without any foundation or any guiding principles. The court remarked that this was a case of cooperative federalism or quasi federalism.

The SG submitted that when two states are doing business, they are competing with each other and requested the matter to be fixed for a bi-parte hearing.

He reiterated that–

"(Article) 286 is pure and simple business of state and as Supreme Court has held, you cannot prevent me from doing business directly or indirectly. They can even regulate the lotteries. I have to take permissions, I have to give them details, with which I have no difficulty but in principle, in law, answer is Rule 5 (of the Lotteries (Regulation) Rules, 2010."

The counsel for respondent State submitted that the real problem was that for every 100 valid legal lottery tickets, thousands of illegal tickets were floated in market. He highlighted the 2019 circular of the Centre regarding the same which stated that a particular lottery operator was indulging in fraud etc. He stated that–

"The argument is that you informed the central government...The problem in Kerala in 2010-11, was that they were banned and the Central Government confirmed the ban in 2015. The figures are very telling. They're giving a return of 98 crores when they're selling tickets of 3700 crores. This is a time where GST etc. is there. So the state not only loses revenue but the Central Government says that Mr Martin has a complete control over the lottery department of the state. In fact, it is a very inelegant way of saying but they're in the pocket. Thus to regulate it, ultimately what the impugned rules do...They are only eliciting the information." 

The court directed the respondents to file a counter affidavit in 3 weeks and issued notice for 29th September while noting that this was an important matter which could not be thrown out and required examining. 

Senior Advocate Pallav Shishodia, AoR Advocates CK Sasi and Advocates Abdulla Naseeh and Meena K Poulose appeared for the State of Kerala

CASE TITLE: State of Nagaland And Ors. v. State of Kerala And Ors. Diary No. 21222/2022

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