CONSTITUTINAL LIMIT OF DELEGATED LEGISLATION

[Mr. M. GOVINDARAJAN]

In India, Legislatures, consistent with their sovereign character, have been held to possess wide powers of delegation.   This power is, however, subject to limitations.   The Legislature cannot delegate essential legislative functions, which consist in the determination or choosing of the legislative policy and of formally enacting that policy into a binding rule of  conduct.   The Legislature cannot delegate ‘unanalyzed and uncontrolled power’.  The delegation is valid only when the legislative policy and guidelines to implement it are adequately laid down and the delegate only is empowered to carry out the policy within the guidelines laid down by the Legislature.

The question, whether any particular legislation suffers from excessive delegation, has to be decided having regard to the subject matter, the scheme, the provisions of the statute including its preamble, and the facts and circumstances in the background of which the statute is enacted.

In ‘Pandit Banarasi Das Bhanot V. State of Madhya Pradesh’ - 1958 (4) TMI 48 - SUPREME COURT OF INDIA it was held that the power to tax is a well recognized legislative power, ample latitude has been allowed to the Legislature to leave to a delegate the power to work out details of a tax policy.  In upholding a power delegated to the State Government for amending the Schedule relating to exemptions in a Sales Tax legislation, Justice Venkatarama Aiyer observed that it is not unconstitutional for the Legislature to have it to the executive to determine details relating to the working of taxation laws, such as the selection of persons on whom the tax is to be paid, the rates at which it is to be charged in respect of different classes of goods and the like.

In ‘Harishankar Bagla V.  State of Madhya Pradesh’ - 1970 (2) TMI 131 - SUPREME COURT OF INDIA the Supreme Court held that while sustaining the legality of section 3 of the Essential Supplies (Temporary Powers) Act, 1946, which gave wide powers to the Central Government to make orders for regulating or prohibiting the production, supply and distribution of essential commodities, was satisfied that it had laid a clear principle and offered sufficient guidance.   It was held that the power conferred by the section therein is to be exercised for maintaining or increasing supplies of any essential commodity, or for, securing their equitable distribution and availability of fair prices.

The Constitution Bench of Supreme Court in ‘Kishan Prakash Sharma V. Union of India’ - 2001 (3) TMI 1018 - SUPREME COURT the Supreme Court laid down the test of constitutional limit of delegated legislation.  The Supreme Court in this case held that the Legislature must set the limits of the power delegated by declaring the policy of the law and by laying down standards  for guidance of those on whom the power to execute the law is conferred.  Thus the delegation is valid only  when the legislative policy and the guidelines to implement it are adequately laid down and the delegate is only empowered to carry out the policy within the guidelines laid down by the Legislature.  The Legislature may, after laying down the Legislative policy, confer discretion on an administrative agency to work out the details within the frame work of the policy.  When the Constitution entrusts the duty of law-making to Parliament and Legislatures of the States, it impliedly prohibits them to throw away that responsibility on the shoulders of some other authority.   An area of compromise is that Parliament cannot work in detail the various requirements of giving effect to the enactment and, therefore, that area will be left  to be filled by the delegatee.

Thus, the question is whether any particular legislation suffers from excessive delegation and in ascertaining the same, the provisions of the statute including its preamble, and the facts and circumstances in the background of which the statute is enacted, the history of the legislation, the comheldplexity of the problems which a modern state has to face, will have to be taken note of and if, on a liberal construction given to a statute, a legislative policy and guidelines for its execution are brought out, the statute, even if skeletal will be upheld  to be valid but this rule of liberal construction should not be carried by the court to the extent of always trying to discover a dormant or latent legislative policy to sustain an arbitrary power conferred on the executive.

The Supreme Court in ‘State of Rajasthan V. Basant Nahata; - 2005 (9) TMI 620 - SUPREME COURT,  held  that the necessity of the Legislature’s delegating its power in favor of the executive is a part of legislative function.   It is a constituent element of the Legislative power as a whole under article 245 of the Constitution.  Such delegation of power, however, cannot be wide, unanalyzed or unguided.  The Legislature, while delegating such power is required to lay down the criteria or standard so as to enable the delegatee to act within the framework of the statute.  The principle on which the power of the Legislature is to be exercised is required to be disclosed.   It is also trite that essential legislative functions cannot be delegated. The procedural powers are, therefore, normally left to be exercised by the executive by reason of a delegated legislation.

There cannot be any doubt whatsoever that the court shall not invalidate a legislation on the ground of delegation of essential legislative function or on the ground of conferring unguided, uncontrolled and vague powers upon the delegate without taking into the preamble of the Act as also other provisions of the statute in the event they provide good means of finding out the meaning of the offending statute.

The Supreme Court in ‘Delhi Race Club Limited V. Union of India’ - 2012 (7) TMI 498 - SUPREME COURT OF INDIA held that there two broad principles in delegation of legislative functions:

• that delegation of non essential legislative function of fixation of rate of imposts is a necessity to meet the multifarious demands of a welfare State but while delegating such a function laying down of a clear legislative policy is pre requisite; and
• while delegating the power of fixation of rate of tax, there must be in existence, inter alia, some guidance, control, safeguards and checks of the Act concerned.

It is manifest that the question of application of the second principle will not arise unless the impost is a tax.   Therefore, as long as the legislative policy is defined in clear terms, which provides guidance to the delegate, such delegation of a non essential function is permissible.

In ‘Holystar Natural Resources (P) Limited V. Union of India’ - 2014 (1) TMI 1639 - DELHI HIGH COURT  it was contended that Section 2(1)(o) of SARFAESI Act was violative of Article 19(1)(g) of the Constitution of India as it gave uncontrolled discretion and arbitrary power in the hands of financial institutions/RBI to declare any entity as an NPA.  Under the SARFAESI Act, the borrower had a very limited to right to question the proceedings and the consequences provided in the Act were drastic.   Consequently, by empowering the banks/financial institutions/RBI to determine what NPA is, there had been a disastrous effect on business, profession and trade of the borrowers.  The court analyzed the provisions of Section 2(1)(o) of the Act which defines NPA as an asset or accountable receivable of a borrower, which has been classified by banks or financial institutions in terms or RBI guidelines as sub standard, doubtful and loss asset.   Clause 4.1 of RBI guidelines classifies NPA into the above three categories.  Once the account finds place in any of these categories, it becomes an NPA with respect to clause 2.1 RBI guidelines.  The classification is done taking into account the degree of well defined credit weakness and extent of dependence on collateral securities for realization of dues.   The Legislature has left it to RBI to identify, define and classify different assets in accordance with the current international best practices as well as the changing economic scenario of the country.  The Court is of the opinion that the Legislature has defined NPA and the RBI issued guidelines to improve quality of assets of the bank and to recover public money speedily.  There is no excessive delegation or scope for the banks to act upon basing on their whims and fancies, but they are governed by the guidelines issued by the RBI which is empowered to issue such guidelines under Section 21 of Banking Regulation Act, 1949.

Discussions to this article

[S Sivakumar, Director S3 Solutions Pvt Ltd, Bangalore]

Very well written. Our thanks to Mr Govindarajan.

Applying this concept to the realm of indirect tax law, I feel that, the amendments to the definitions of 'inputs' and 'input services' with effect from 1-4-2011 are classic examples of how the Executive has overreached, vis-a-vis the powers conferred on it by Sections 37 of the CEA and 94 of the Finance Act, 1994. Talking specifically of the powers granted to the Government by Section 94 of the FA, 1944, it would seem that the restrictions placed on developers of commercial complexes to avail of cenvat credit on construction services which is the result arising out of the amendment to the definition of 'input service' wef 1-4-2011 is ultra vires, the Finance Act, 1994.

Kind rgds

S Sivakumar, Advocate, Bangalore

[MARIAPPAN GOVINDARAJAN]

Dear Sir,

Your views are correct. There are so many in CENVAT credit. Such practices could be stopped only by challenging the same before High Court