NATIONAL LAW UNIVERSITY ODISHA

CONSTITUTIONAL LAW I PROJECT

CASE COMMENTARY
ON

ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR

PRADESH

Submitted by:
ABHILASHA PANIGRAHI 2014/BBA LLB/ 001

ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR PRADESH

TABLE OF CONTENTS
TABLE OF AUTHORITIES

III

FACTS OF THE CASE

ISSUES IDENTIFIED IN THE CASE

DECISION GIVEN BY THE COURT

REASONS FOR THE DECISIONS OF THE COURT

I.

JUSTICE D.A. DESAI

1.

Issue 1: Whether or not the State legislature had no legislative competence to enact the

impugned Act.
2.

Issue 2: Whether or not the Act violated Article 31 of the Constitution because the

acquisition was not for a public purpose and the compensation proposed in the Act was
illusory.
3.

Issue 3 & 4: Whether or not the Act infringed the guarantee of equality enshrined in

Article 14 of the Constitution and also whether or not the provisions of Article 19 (1) g and f
were violated.
II.

11

JUSTICE R.S. PATHAK

12

ANALYSIS OF THE JUDGMENT

13

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ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR PRADESH

TABLE OF AUTHORITIES
CASES
Baijnath Kedia v. State of Bihar and Ors

Canadian Pacific Railway Company v. Attorney General

Ishwari Khetan Sugar Mills (P) Ltd. and Ors. Vs.State of Uttar Pradesh and Ors.

Kannan Devan Hills Produce Company Ltd. v. The State of Kerala and Another

Rajamundry Electric Supply Corporation Ltd. v. State of Andhra Pradesh

Rustom Cavasjee Cooper v. Union of India

State of Bihar v. Maharajadhiraja Sir Kameshwar Singh

State of Gujarat v. Shantilal Mangaldas and

10

State of Gujarat v. Shantilal Mangaldas and Ors.

State of Haryana and Anr. v. Chanan Mal

State of West Bengal v. Union of India

Vajravelu Mudaliar v. Special Deputy Collector of Land Acquisition, West Madras

STATUTES
Constitution of India

4, 9

Industries (Development and Regulation Act), 1951.

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ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR PRADESH

FACTS OF THE CASE

In response to the serious problems created by the owners of certain sugar mills in the State of
Uttar Pradesh for cane growers and labour employed in sugar mills, which were having an adverse
impact on the general economy of the areas where these sugar mills were situated and with a view
to ameliorating the situation posing a threat to the economy, the Governor of Uttar Pradesh
promulgated an Ordinance on July 3, 1972, by the name of U.P. Sugar Undertaking (Acquisition)
Ordinance, 1971 (13 of 1971) (hereinafter referred to as the ordinance), with a view to
transferring and vesting sugar undertakings set out in the Schedule to the Ordinance in the U.P.
State Sugar Corporation Ltd., (hereinafter known as the corporation), a Government Company
within the meaning of Section 651 of the Companies Act, 1956. Subsequently, by U.P. Sugar
Undertakings (Acquisition) Act, 1971, (U.P. Act 23 of 1971) ('Act' for short), the Ordinance was
repealed and was replaced. Schedule to the Act enumerates 12 sugar undertakings (hereinafter
referred to as 'scheduled undertakings') and by the operation of Section 3, these scheduled
undertakings stood transferred to and vested in the Corporation from the appointed day, i.e. July
3, 1971, the date on which the Ordinance was issued. On the promulgation of the Ordinance 11
writ petitions were filed in the Allahabad High Court under Article 226 of the Constitution
challenging the constitutional validity of the Ordinance and when the Act replaced the Ordinance
effective from August 27, 1971, the writ petitions were amended incorporating the challenge to
the Act also. The Ordinance and the Act were challenged in the High Court on the following
grounds:
(1) The State legislature had no legislative competence to enact it;
(2) The Act violated Article 31 of the Constitution because the acquisition was not for a public
purpose and the compensation proposed in the Act was illusory;
(3) The Act was in breach of Article 19(1)(f) and (g) of the Constitution;
(4) The Act infringed the guarantee of equality enshrined in Article 14 of the Constitution.
A Division Bench of the High Court by a common judgment dated May 3, 1979, repelled the
contentions on behalf of the petitioners and upheld the constitutional validity, of the Act. Hence
the owners of the scheduled undertakings have now appealed before the Honble Supreme Court.
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ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR PRADESH

ISSUES IDENTIFIED IN THE CASE

(1) Whether or not the State legislature had no legislative competence to enact the impugned Act.
(2) Whether or not the Act violated Article 31 of the Constitution because the acquisition was not
for a public purpose and the compensation proposed in the Act was illusory.
(3) Whether or not the Act was in breach of Article 19(1) (f) and (g) of the Constitution.
(4) Whether or not the Act infringed the guarantee of equality enshrined in Article 14 of the
Constitution.

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ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR PRADESH

DECISION GIVEN BY THE COURT

The decision of his Honble Justice D.A. Desai, was that he found no merit in all the appeals and
special leave petitions filed in this case and hence, he dismissed all the appeals and special leave
petitions with cost in one set. And his fellow judge, his Lordship Justice R.S. Pathak, following
the suit of his learned co-judge, he also reached the same conclusion regarding the points of
controversy and dismissed the appeals and special leave petitions with cost.

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ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR PRADESH

REASONS FOR THE DECISIONS OF THE COURT

I.

JUSTICE D.A. DESAI

1. ISSUE 1: WHETHER OR NOT THE STATE LEGISLATURE HAD NO LEGISLATIVE

COMPETENCE TO ENACT THE IMPUGNED ACT.

On this main issue of the case, the Honble Justice D.A. Desai discussed this in details after hearing
the contentions from both the parties. The appellants, represented by Mr. F.S. Nariman, contended
that the under the Industrial (Development and Regulation) Act, 1951 (hereinafter referred to as
IDR Act), the Union Govt. under Article 246 read with Entry 52 of the Union List (List I) has
made Sugar Industry an industry expedient to public interest. In the constitution of India, the
industries have been under state control under entry 24 of the State List. But, Entry 24 in List II
(State List) reads as under:
Industries subject to the provisions of entries 7 and 52 of List I.1
Since, sugar has been declared as an industry expedient to public importance under the IDR Act,
this denudes the state legislature of their legislative competence to make laws related to Sugar
undertakings.
The question before the court was that when an industry is declared to expedient to public interest,
what is the extent of control the union has over the same. So, to answer this question the court
looked into several judgments to look at the precedents set in this matter and the historical
background in which these entries have been passed.
The scope and content of Entry 52 of List I is to be done so as to not create any confusion and so
as not to hamper the powers of the states. The title head, Industry as a whole has been covered
under Entry 24 of the List II, which subject to conditions of Entry 7 and 52 of the List I. This
means if a particular industry is necessary for the purpose of defense or for prosecution of war
(Under Entry 7) or it becomes expedient to public importance (under Entry 52), then the parliament

Constitution of India, Seventh Schedule, List II.

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ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR PRADESH
gets exclusive rights to legislate in those matters because then the industry would be taken out of
the scope of Entry 24 of List II.
But here another thing which the court had to decide was on the matter that when Parliament
declares such an industry, then whether the entire industry or just a part of it comes under the scope
of the legislative powers of the union.
The court hear was of the opinion that when the declaration has to be made, then it has to be
followed by a legislation which declares the powers which the union has over the industry or the
extent of control of the Union.
To answer this question in details the court looked into details of cases like Baijnath Kedia v. State
of Bihar and Ors2, where it was stated that:
Once this declaration is made and the extent laid down, the subject of legislation to the
extent laid down becomes an exclusive subject for legislation by Parliament. Any
legislation by the State after such declaration and trenching upon the field disclosed in the
declaration must necessarily be unconstitutional because that field is abstracted from the
legislative competence of the State Legislature ... The only dispute, therefore, can be to
what extent the declaration by Parliament leaves any scope for legislation by the State
legislature. If the impugned legislation falls within the ambit of such scope it will be valid,
if outside it, then it must be declared invalid.3
Also the court relied on the judgment of, State of Haryana and Anr. v. Chanan Mal4 in which it
was decided that:
Moreover, power to acquire for purposes of development and regulation has not been
exercised by Act 67 of 1957. The existence of power of Parliament to legislate on this topic
as an incident of legislative power on another subject is one thing. Its actual exercise is
another. It is difficult to see how the field of acquisition could become occupied by a central
Act in the same way as it had been in the West Bengal case even before Parliament
legislates to acquire land in a State.5
2

1970 2 SCR 100.

Baijnath Kedia v. State of Bihar and Ors, Ibid.
4
1976 3 SCR 688.
5
State of Haryana and Anr. v. Chanan Mal, Ibid.
3

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ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR PRADESH
Based on these judicial pronouncements, the court held that before State legislature is denuded of
power to legislate under entry 24, List II in respect of a declared industry, the scope of declaration
and consequent control assumed by the Union must be demarcated with precision and then proceed
to ascertain whether the impugned legislation trenches upon the excepted field6.
So, now all that had to be seen is what the legislation, i.e IDR Act, said about the control assumed
by the Union over the Sugar Industry.
The section 2 of the IDR Act states that:
It is hereby declared that it in expedient in the public interest that the Union should take
under its control the industries specified in the First Schedule.7
Now the court on the contentions of the appellants that the said act put on restriction on the control
over the sugar industry said that,
The control has to be concrete and specific and the manner of its exercise has to be laid
down in view of the well-established proposition that executive authority must have the
support of law for its action. In a country governed by rule of law, if the Union, an
instrumentality for the governance of the country, has to exercise control over industries
by virtue of a declaration made by Parliament, it must be exercised by law. Such law must
prescribe the extent of control, the manner of its exercise and enforcement and
consequence of breach. There is no such concept as abstract control. The control has to be
concrete and the mode and method of its exercise must be regulated by law. Now
Parliament made the declaration not in abstract but as part of the IDR Act and the control
was in respect of industries specified in the First Schedule appended to the Act itself.8
The court finally held that the under the provisions of Entry 52 of List I, the union had assumed
control over the industry as prescribed under the Sections 3 to 30 of the IDR Act, i.e. control over
the management of the sugar industry and undertakings. And thus the state was denude of its power
to pass any legislation which gives the states any power over the control of the management of the
Sugar industry.

Ishwari Khetan Sugar Mills (P) Ltd. and Ors. Vs.State of Uttar Pradesh and Ors. AIR 1980 SC 1955.
Industries (Development and Regulation Act), 1951. Sec. 2.
8
Supra Note at 5.
7

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ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR PRADESH
Then, the court looked into the impugned act under challenge, and the contention by the state of
UP that the said act was bought under Entry 42 of the concurrent list and it dealt with the
acquisition of the sugar undertakings by the government and it was not under Entry 24 of List II.
And hence the state had enough legislative competence to enact the said act.
Now, the following point was challenged by the appellants on the ground that Entry 42 of the
Concurrent List is not an independent entry and it has to be read with some other entry. And so the
impugned act which came into existence must have been under Entry 24 of the State list, and hence
it is subject to provisions of Entry 52 and hence the same is unconstitutional on the grounds that
the state is not competent enough to enact such legislation.
The court here referred to the landmark judgment of Rustom Cavasjee Cooper v. Union of India9,
which reiterated that:
..power to legislate for acquisition of property is exercisable only under entry 42 of List
III and not as an incident of the power to legislate in respect of a specific head of legislation
in any of the three lists.10
Court also relied on judgments of State of Bihar v. Maharajadhiraja Sir Kameshwar Singh

11

and

Rajamundry Electric Supply Corporation Ltd. v. State of Andhra Pradesh12, which said:
In my opinion, to give a meaning and content to each of the two legislative heads under
entry 18 and entry 36 in List II the former should be read as a legislative category or head
comprising land and land tenures and all matters connected therewith other than
acquisition of land which should be read as covered by entry 36 in List II.13
The court thus concluded that:
Thus clearly transpires that the observation in Cooper's case supra extracted above that
power to legislate for acquisition of property is exercisable only under entry 42 of List III
and not as an incident of the power to legislate in respect of a specific head of legislation

1970 3 SCR 530.

R.C. Cooper v. Union of India. Ibid.
11
1952 1 SCR 889.
12
1954 1 SCR 779.
13
State of Bihar v. Kameshwar Singh. Ibid.
10

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ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR PRADESH
in any of the three Lists, is borne out from Rajamundary Electric Supply Corporation case
and Maharajadhiraja Sir Kameshwar Singh's cases14
The honble lordships also discussed the cases of State of West Bengal v. Union of India15, Kannan
Devan Hills Produce Company Ltd. v. The State of Kerala and Another16, also the Privy Council
decision of Canadian Pacific Railway Company v. Attorney General17. The final conclusion
reached by the court in this regard was that Entry 42 of List III is an independent entry and it can
exist without any combining with any other entry.
The court stated as follows:
There is thus a long line of decisions which clearly establishes the proposition that power
to legislate for acquisition of property is an independent and separate power and is
exercisable only under entry 42, List III and not as an incident of the power to legislate in
respect of a specific head of legislation in any of the three lists. This power of the State
legislature to legislate for acquisition of property remains intact and untrammeled except
to the extent where on assumption of control of an industry by a declaration as envisaged
in entry 52, List I, a further power of acquisition is taken over by a specific legislation.18
The court found that in true nature the impugned act was one which was for acquisition of the
Sugar undertakings and that by doing so, the State only acquired ownership of the Sugar
undertakings and that in any way did not affect the functioning of the Union, as the Union could
still have control over the management of the Sugar Industry and it doesnt matter whether the
ownership of the industries is with the government of the State or a private body. Hence, the State
has legislative competence to enact the Act.

14

Supra note at 5.
1964 1 SCR 371.
16
1973 1 SCR 356.
17
1950 A.C. 122.
18
Supra note at 5.
15

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ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR PRADESH
2. ISSUE 2: WHETHER OR NOT THE ACT VIOLATED ARTICLE 31 OF THE CONSTITUTION
BECAUSE THE ACQUISITION WAS NOT FOR A PUBLIC PURPOSE AND THE
COMPENSATION PROPOSED IN THE ACT WAS ILLUSORY.

The second issue on the violation of Article 31 of the Constitution of India, was dealt by the
Honble lordships by focusing on the wordings of the Article and the word compensation,
Article 31(2) reads as:
No property shall be compulsorily acquired or requisitioned save for a public purpose
and save by authority of a law which provides for compensation for the property so
acquired or requisitioned and either fixes the amount of the compensation or specifies the
principles on which, and the manner in which, the compensation is to be determined and
given; and no such law shall be called in question in any court, on the ground that the
compensation provided by that law is not adequate.19
The word compensation used here was interpreted with the help of the precedent set by the case
of Vajravelu Mudaliar v. Special Deputy Collector of Land Acquisition, West Madras20, on which
the court affirmed the interpretation of the word 'compensation' to mean just equivalent. 21 And
also the decision of the constitutional bench in the case of Court in State of Gujarat v. Shantilal
Mangaldas and Ors.22 Was referred where it was said that:
The Court then proceeded to hold that the two principles laid down in Clause (b) of
Paragraph II of the Schedule to the Act-(i) that compensation was to be equal to the cost
price in the case of unused machinery in good condition, and (ii) written down value as
understood in the Income-tax law was to be the value of the used machinery were irrelevant
to the fixation of the value of the machinery as on the date of acquisition.
We are unable to agree with that part of the judgment. The Parliament had specified the
principles for determining compensation of the undertaking of the company. The principles
expressly related to the determination of compensation payable in respect of unused
machinery in good condition and used machinery. The principles were set out avowedly
19

Constitution of India, Art. 31 (2).

1965 1 SCR 516.
21
Vajravelu Mudaliar v. Special Deputy Collector of Land Acquisition, West Madras. Ibid.
22
1969 3 SCR 341.
20

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ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR PRADESH
for determination of compensation. The principles were not irrelevant to the determination
of compensation and the compensation was not illusory.23
The court thus decided that the undertakings were sick industries and were a burden to the economy
of the state. Even after the change in management under the IDR Act nothing substantial changed
in their financial situation, so the acquisition was called for and the matter of just compensation is
something which cannot be brought under judicial review and thus the said issue did not stand.
The exact words of the Honble Supreme Court were:
The situation had not improved even when managements of some of the undertakings
were taken over under the IDR Act and, therefore, this desperate situation called for a
drastic remedy in public interest and while applying that drastic remedy of acquisition
principles which are valid for determining the value of machinery were adopted. The
adequacy or otherwise of compensation on the calculus made by applying the principle is
beyond the judicial review. It would be a day time hallucination to call such principle
irrelevant or compensation illusory.24

23
24

State of Gujarat v. Shantilal Mangaldas and Ors Ibid.

Supra note at 6.

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ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR PRADESH
3. ISSUE 3 & 4: WHETHER OR NOT THE ACT INFRINGED THE GUARANTEE OF EQUALITY
ENSHRINED IN ARTICLE 14 OF THE CONSTITUTION AND ALSO WHETHER OR NOT THE
PROVISIONS OF ARTICLE 19 (1) G AND F WERE VIOLATED.

The court found these two issues as desperate measures by the Appellants and the issue of violation
of Article 19 (1) g and f were dismissed without discussion. The last issue under discussion was
the violation of the right to equality. As it was contested by the appellants that the companies
selected had no intelligible differentia or criteria for selection and the process of selecting
companies was arbitrary.
The court held that:
Sustenance was largely sought to be drawn from the Report of Justice Bhargava styled
as Sugar Industry Inquiry Commission, 1974, which inter alia, specified 17 sugar
undertakings in Uttar Pradesh as prima facie sick sugar mills. After reading out a portion
of the Report it was said that classifying the 12 sugar undertakings for acquisition is not
based on any intelligible differentia between those included in the group for acquisition
and those left out and that this differential treatment has no rational relationship to the
object sought to be achieved by the impugned legislation.25
Thus, the Honble Supreme Court said that there was enough intelligible differentia for the
selection of the said 12 companies and hence the issue was dismissed.
In the end his Lordship Justice D.A. Desai states that:
Acquisition was for an avowed object of rejuvenating these, undertakings and thereby
improving the economy of the area by providing priority in payment to cane growers,
labour, in respect of whom there is no cushion, for sufferance. Thus, this differentia
undoubtedly has a rational relationship to the object sought to be achieved by the Act. The
challenge of Article 14 was an argument of despair and must be repelled.26

25
26

Ishwari Khetan Sugar Mills (P) Ltd. and Ors. Vs.State of Uttar Pradesh and Ors. AIR 1980 SC 1955.
Ibid.

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ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR PRADESH

II.

JUSTICE R.S. PATHAK

The Lordship agreed with his fellow judge on most points but did not comment on the subject that
whether the scope of Entry 52 of List I can be limited for any industry to be again covered under
List II Entry 24. He concluded by saying:
whether the declaration made by Parliament in Section 2 of the Industries (Development
and Regulation) Act, 1951 in respect of the industries specified in the First Schedule to that
Act can be regarded as limited to removing from the scope of Entry 24 of List II of the
Seventh Schedule to the Constitution only so much of the legislative field as is covered by
the subject matter and content of that Act or it can be regarded as effecting the removal
from that Entry of the entire legislative field embracing all matters pertaining to the
industries specified in the declaration.27
His lordship had no problem with any other reasons cited by his fellow judge and he also
dismissed the petitions and the Special Leave Petitions.

27

Ibid.

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ISHWARI KHETAN SUGAR MILLS (P) LTD. VS. STATE OF UTTAR PRADESH

ANALYSIS OF THE JUDGMENT

The following case has a detailed explanation about the quasi-federal nature of our Indian
Constitution. The lordships have analyzed the powers given to the State and the Union under the
lists in the Seventh Schedule of the Constitution and also talked about the scenarios where there is
an encroachment by one upon the legislative territory of another.
The primary issue of this case was related to the scope of Entry 52 of the List I (Union List) and
the scope of Entry 24 of the List II (State List). There were a number of landmark cases which
were referred to by the Honble Lordships in deciding this case, and the majority of the judgment
deals with the issue of interpretation of the entries. The judges have used the rule of Pith and
Substance to find out the true nature of the entries and then referred to the earlier precedents and
have upheld quite a few precedents relating to the dispute of Entry 52 and Entry 24 in the Union
and State List respectively.
The precedent which has been set by Justice D.A. Desai in this following case is related to the
interpretation of Entry 52, which according to him should be interpreted in this way. He
emphasizes on the fact that when any industry is declared as expedient to public interest by the
Union, the Union must by passing a legislation define the extent of control it has over the industry
thus declared as expedient.
He further goes on to add that even though an industry has been declared expedient to public
importance by the Union, the State can still make legislations in this regard if the extent of control
defined by the legislation of the Union is not encroached upon by the State. Thus, he says that if
both State and the Union laws can co-exist then there would be no issue of legislative incompetence
of the State.
Even, though his fellow judge, his Lordship Justice R.S. Pathak did not comment on this issue. He
had a concurrent view regarding this issue. But, the final precedent set by this case will the decision
and reason cited by Justice D.A. Desai.
This judgment also deals with the issue of just compensation and says that the judicial review of
what is a just compensation according to the circumstances is not possible. Overall the judgment
is very well structured with reasons being provided for every issue dealt with by the Honble Court.
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