Appeal No 12355 669 Appeal by special leave from the judgment and order dated November 12 1951 of the Punjab High Court in Writ Petition No 116 of 1951
N C Chatterjee section N Andley J B Dadachanji and Rameshwar Nath for the appellants
section M Sikri Advocate General for the State of Punjab N section Bindra and D Gupta for the respondent
September 13
The Judgment of the Court was delivered by DAs GUPTA J
This appeal is against the judgment of the High Court of Punjab rejecting the appellant s application under article 226 of the Constitution
In this application the appellants who had been carrying on the business of commission agents in Forward Contracts at Ludhiana alleged that the Punjab Forward Contracts Tax Act 1951 Punjab Act No VII of 1951 was ultra vires the powers conferred upon the State Legislature and prayed for a declaration that the Act and the notification made and the rules promulgated thereunder by the respondent State of Punjab were void
There was a further prayer for directing the State of Punjab by a writ of mandamus or other appropriate writ to allow the petitioners to carry on the business of Forward Contracts or as commission agents in Forward Contracts unrestricted by the provisions of the above mentioned Act and the rules thereunder And not to enforce the Act
The respondent s case as made in para
5 of its written statement was that  the impugned Act is not ultra vires the State Legislature
It is a law with respect to the matters enumerated in Entry 62 of the State List read with Entry No 7 of the Concurrent List of the 7th Schedule
 The High Court held that The impugned Act is an Act to tax speculation in futures at least so far as dealers such as the present applicants are concerned falls within Item 62 of the State List as an Act to impose taxes on betting and gambling and to that extent at least is valid
 670 In this view the High Court rejected the application
The only question for our decision is as regards the legislative competence of the State Legislature of Punjab to enact this statute
Though a reference under Entry 7 of the Concurrent List of the 7th Schedule of the Constitution was made in the respondent s written statement no reliance appears to have been placed on this entry in the High Court nor has it been relied on before us by the learned counsel appearing on behalf of the respondent and it is quite clear that the impugned Act cannot fall within Item 7 of the Concurrent List which is in these terms Contracts including partnership agency contracts of carriage and other special forms of contracts but not including contracts relating to agricultural land 
It is common ground before us that the Act must be held to be within the legislative competence of the Punjab State Legislature only if in pith and substance it fell within Item 62 of the State List and if it did not so fall it must be held to be beyond the State Legislature s competence
Item 62 mentions  taxes on luxuries including taxes on entertainment amuse ments betting and gambling
 If the impugned Act provides for a tax on betting and gambling then and then only it can come within Item 62
The Act provides for the levy of a tax on forward contracts and it has defined  forward contract in section 2 in these words Forward contract means an agreement oral or written for sale of goods on a future date but on the basis of which actual delivery of goods is not made or taken but only the difference between the price of the goods agreed upon and that prevailing on the date mentioned in the agreement or any other date is paid or received by the parties 
 Dealer  is defined in the same section to mean  any person firm Hindu Joint family or limited concern including an arhti or  chamber  or association formed for the purpose of conducting business in forward contracts who conducts such business in the course of trade in the State either on his own behalf or on behalf of any other person arhti chamber or association
Sale is defined to mean 671 the final settlement in respect of an agreement to sell goods mentioned in a forward contract and it shall be deemed to have been completed on the date originally fixed in the forward contract for this purpose or any other date on which the final settlement is made 
Section 4 is the charging section and provides for a levy on the business in forward contracts of a dealer a tax at such rates as the Government may by notification direct
Section 5 lays down that every dealer shall be liable to pay tax under this Act as long as he continues his business in forward contracts
Section 6 prohibits any dealer from carrying on business in forward contracts unless he has been registered and possesses a registration certificate
Section 7 deals with the mode of payment of the tax and for submission of returns while section 8 provides for assessment of the tax
As the term  forward contract  has been defined in the statute itself we have to forget for the purpose of deciding the present question any other notion about what a forward contract means
For the purpose of this statute every agreement for sale of goods on a future date is not a  forward contract 
It has to be an agreement for the sale of goods on a future date and has to satisfy two other conditions viz 1 actual delivery of the goods is not made on the basis of the agreement and 2 the difference between the price of the goods agreed upon and that prevailing on the date mentioned in the agreement or any other date is paid by the buyer or received by the seller
The test of a forward contract under this definition is that delivery of goods is not made or taken but only the difference between the price of the goods as agreed upon and that prevailing on some other date is paid
Is such a contract necessarily a wagering contract and therefore gambling  When two parties enter into a formal contract for the sale and purchase of goods at a given price and for their delivery at a given time it may be that they never intended an actual transfer of goods at all but they intended only to pay or receive the difference according as the market price should vary from the 86 672 contract price
When such is the intention it has been held that is not a commercial transaction but a wager on the rise or fall of the market which comes within the connotation of  gambling 
It is the fact that though in form an agreement for sale purports to contemplate delivery of the goods and the payment of the price neither delivery nor payment of the price is contemplated by the parties and what is contemplated is merely the receipt and payment of the difference between the contract price and the price on a later day that makes the contract a wagering contract
In the definition of  forward contract in the impugned Act there is no reference directly or indirectly  to such an intention
It is only by reading for the words  actual delivery of goods is not made or taken  the words actual delivery of goods is not to be made or taken and by substituting for the words  is paid or received by the parties  the words  is to be paid or received by the parties  and also by omitting the words  on the basis of which  that the word  forward contract  as defined in the section can be held to refer to a wagering contract
This however we are not entitled to do
The reason why the Legislature did not use the words  to be made or taken  or  to be paid or received  in the definition clause is not far to seek
An agreement oral or written which in terms provides that actual delivery is not to be made or taken and that the entire price of the goods is not to be paid and only the difference between the price of the goods agreed upon and that prevailing on some other date would be paid would be hit by section 30 of the Contract Act and would not be enforceable
Parties to a written agreement for sale of goods would therefore take good care to see that the terms do not provide that delivery should not be made but only the difference is to be paid
There might be an oral understanding between the parties that no delivery should be demanded or made but that only difference should be paid
But it will be next to impossible for a tax being imposed on the proof of such intention not expressed in the written contract
When the agreement for sale of goods is oral but the parties 673 agree as between themselves that no delivery would be made but difference in price would be paid it would be equally impossible for a taxing authority to discover in which of the contracts such an agreement has been made
The dispute whether a particular contract is a wagering contract or not arises in civil courts generally when the contract of sale is sought to be enforced and one of the parties tries to avoid the contract by recourse to section 30 of the Contract Act
When such a dispute comes before the Court it becomes necessary to consider all the circumstances to see whether they warrant the legal inference that the parties never intended any actual delivery but intended only to pay or receive the difference according as the market price should vary from the contract price
It is therefore well nigh impossible for any taxing authority to brand a particular forward con
tract as a wagering contract  nor is it to be expected that any party on whom the tax is sought to be levied will voluntarily disclose that in the particular contract or in a number of contracts the intention was not to deliver the goods but only to pay or receive the difference in price
Aware of these difficulties in the practical application of a law to levy tax on wagering contracts the legislature decided to levy tax on contracts for sale of goods in which actual delivery is not factually made or taken whatever be the intention at the time when the agreement was made
It appears clear therefore that the words  forward contract  as defined in the Act do not set out all the elements which are necessary to render a contract a wagering contract and so the impugned legislation to tax forward contracts as defined does not come within
Entry 62
The learned Advocate General for the State of Pun
jab tried to convince us that even though the words used in defining forward contract may include contracts which do not amount to wagering contracts they are wide enough to include certain contracts which may be wagering contracts because of the fact that the parties to the contract had no intention to 674 deliver the goods
If the definition is wide enough to include contracts which are wagering contracts he contends the statute should not he struck down as a whole but should be held to be valid in respect only of such wagering contracts
On behalf of the appellants Mr N C Chatterjee has drawn our attention to the provisions of registration of  dealers  in section 6 and has argued that the very fact that the Legislature was calling upon persons dealing in  forward contracts  to register themselves and to prohibit dealing in forward contracts by non registered dealers justifies the conclusion that the Legislature was not thinking of wagering contracts at all
As against this it is proper to note that the Constitution itself contemplated taxation on gambling  by State Legislatures
It is however one thing to tax gambling and quite another thing for a Legislature to encourage gambling by asking persons to register themselves for this purpose
The definition of a  dealer  it has to be noticed includes  a limited concern including a Arhti Chamber or association formed for the purpose of conducting business in forward contracts 
While it might happen in fact that an association would be formed for the purpose of conducting business in wagering contract it is hardly likely that the Legislature would take upon itself the task of openly permitting and recognizing such associations
These in our opinion are good reasons for thinking that the Legislature did not contemplate wagering contracts at all in defining  forward contract in the way it did
Assuming however that the definition is wide enough to include wagering contracts the question arises whether the portion of the Act which would then be valid is severable from the portion which would remain invalid
One of the rules approved by this Court in R M D Chamarbaugwala vs The Union of India 1 for deciding this question was laid down in these words In determining whether the valid parts of a statute are separable from the invalid parts thereof it 1  675 is the intention of the legislature thatis the determining factor
The test to be applied is whether the legislature would have enacted the valid part if it had known that the rest of the statute is invalid
 A second rule was that if the valid and invalid parts of a statute are independent and do not form part of a scheme but what is left after omitting the invalid portion is so thin and truncated as to be in substance different from what it was when it emerged out of the legislature then also it will be rejected in its entirety
 Applying either of these rules we are bound to hold that the entire Act should in the present case be held invalid
It seems to us clear that if the Legislature had been conscious that taxation on all forward contracts was not within its legislative competence it would have at once seen that because of the difficulty of finding out which among the contracts for sale of goods on a future date are wagering contracts it would not be worthwhile to enact any law for taxing wagering contracts only
It is equally clear that once the law is held to be invalid as regards forward contracts other than wagering contracts what is left is  so thin and truncated as to be in substance different from what it was when it emerged out of the legislature 
The respondent s contention that the statute should be hold to be valid in respect of wagering contracts even though invalid as regards other forward contracts must therefore also be rejected
Our conclusion therefore is that the impugned statute does not fall within Item 62 of the State List and that it is beyond the legislative competence of the State Legislature
The appellants were therefore entitled to appropriate reliefs as prayed for in their petition under article 226 of the Constitution
We therefore allow this appeal set aside the order of the High Court and direct that the petition under article 226 of the Constitution be allowed and declare that the Punjab Forward Contracts Tax Act No VII of 1951 is void and unconstitutional as it is ultra vires the powers of the State Legislature that the notification made under the rules promulgated by the 676 respondent under this Act are also void and unconstitutional and that a mandamus do issue directing the respondent to allow the petitioners to carry on the business of forward contracts or as commission agents for forward contracts unrestricted by the provisions of the said Punjab Forward Contracts Tax Act No VII of 1951 and the rules thereunder and not to enforce the provisions of this Act and the rules
The appellants will get their costs in this Court as also in the court below
Appeal allowed


Summary:
The State of Travancore Cochin merged with Indian Union on March 7 1949 but the Travancore Income tax Regulation VIII of 1096 Malayalam Era and the Travancore Taxation on Income Investigation Commission Act II24 Malayalam Era continued to apply to that area not withstanding the merger
On August 6 1949 the Travancore Cochin Government passed an order referring the case of the appellants to the com mission constituted under the Travancore Taxation on Income Investigation Commission Act 1124 M E
The investigation commission held by its report that the appellants had made a secret profit in the accounting year 1118 M E which was not included in the income tax return submitted by the appellants earlier
The Travancore Cochin Government accepted the report and directed recovery of the tax due by its order dated February 14 1950
The Income tax Officer without holding any fresh assessment proceedings issued a demand notice
The Union Legislature enacted the Opium and Revenue Laws Extension of Application Act 33 of 1950 providing for extension of certain opium and revenue laws to certain parts of India
In exercise of the authority under section 82 of the said Travancore Investigation Act read with section 3 cl
c of the Opium and Revenue Laws Extension of Application Act the Government of India on October 25 1951 directed that appropriate assessment proceedings under the Travancore Income tax Act be taken against the appellants with a view to assess or reassess the concealed income which bad escaped assessment
The Commissioner of Income tax withdrew the earlier notice of demand and thereafter the Income tax Officer after reassessment proceedings directed the appellants to pay income tax and super tax on the concealed income
The said orders of the Government of India and of the 467 Income tax Officer were questioned by the appellants and the matter was referred by the Commissioner of Income tax to the High Court
The High Court held that the orders in question were valid orders
The appellant appealed with special leave
Held that the Government of India had the powers under section 3c of the  to direct proceedings for assessment or reassessment under the Travancore Income tax Regulation after consideration of the report made by the Travancore Investigation Commission
The order passed by the Government of India on February 14 1950 was not inconsistent with the order passed by the Travancore Cochin Government
Liability to pay income tax would arise only on an effective order of assessment
No such order having been passed by the Income tax Officer in the instant case there could be no doubt as to the competency of the Government of India to direct proceedings for assessment
There is nothing in section 82 of the Travancore Taxation on Income Investigation Commission Act which states that action may be taken thereunder only once and if an unauthorised direction is given thereunder there is nothing which prevents rectification of that order
By sub section
4 of section 8 of the Travancore Taxation on Income Investigation Commission Act the findings by the Investigation Commission are final in all assessment or reassessment proceedings
Section 82 of the Act removed the bar of limitation which arose by section 25 of the Income tax Act
Consequently it was competent to the Income tax Officer to reopen the assessment proceedings notwithstanding any lapse of time and the previous order of assessment did not operate as a bar to such re assessment