Introduction:
In State of Karnataka & Anr. v. Sri Guruswamy & Others, the Karnataka High Court delivered a significant ruling on the nature of liquor licences, the scope of state policy, and the constitutional validity of delegated legislation in the excise regime. The Division Bench comprising Chief Justice Vibhu Bakhru and Justice C.M. Poonacha set aside an interim stay granted by a Single Judge and upheld the amended Rules 5 and 5A of the Karnataka Excise (Sale of Indian & Foreign Liquors) Second Amendment Rules, 2025.
The case arose from a challenge by bar licensees and former license holders against the State’s decision to introduce e-auctions and reservation norms for grant of liquor licences, along with provisions leading to forfeiture of non-renewed licences. The petitioners argued that such amendments were arbitrary, beyond the scope of the parent legislation, and violative of constitutional principles.
At the heart of the dispute lay a fundamental question: whether holders of liquor licences possess a vested right to renewal, or whether such licences remain subject to the evolving policy framework of the State. The High Court’s ruling decisively answered this in favour of the State, reaffirming that liquor trade is a state privilege and not a fundamental right.
Arguments by the Petitioners:
The petitioners, comprising existing and former bar licensees as well as legal heirs of such license holders, challenged the amended rules on multiple grounds. Their primary contention was that the introduction of e-auction and reservation norms under Rules 5 and 5A exceeded the scope of the enabling provisions of the Karnataka Excise Act, 1965.
They argued that the Act did not contemplate such sweeping changes, particularly the imposition of reservation-based eligibility criteria and the automatic forfeiture of licences that were not renewed by a specified date. According to the petitioners, these provisions amounted to an arbitrary exercise of power and were ultra vires the parent statute.
A key argument advanced by the petitioners was that they had a legitimate expectation—and indeed a vested right—to renewal of their licences. Having operated under a particular regulatory regime for several years, they contended that the State could not abruptly alter the rules in a manner that deprived them of their livelihood.
The petitioners further argued that the proviso to Rule 5, which enabled the grant of licences through e-auction based on reservation norms, constituted excessive delegation of legislative power. They contended that the State had effectively delegated its rule-making authority without providing clear guidelines or safeguards, leading to arbitrary decision-making.
Another significant contention was based on Article 14 of the Constitution. The petitioners argued that the amended rules were discriminatory, as they applied only to certain categories of licences (such as CL-2, CL-9, and CL-11(C)) while excluding others. This selective application, they claimed, lacked any rational basis and violated the principle of equality.
The petitioners also challenged the provision under Rule 5A, which provided for automatic forfeiture of licences that were not renewed. They argued that this provision effectively cancelled their existing rights without due process, thereby causing serious prejudice.
Additionally, the petitioners contended that the introduction of e-auctions would create an uneven playing field, favouring those with greater financial resources and excluding smaller or traditional licensees.
Arguments by the Respondents (State):
The State of Karnataka, defending its policy, argued that the regulation of liquor trade falls squarely within its domain and is a matter of policy and privilege rather than a fundamental right. It emphasized that the manufacture, distribution, and sale of intoxicants are activities over which the State exercises exclusive control.
The State relied on its powers under Section 71 of the Karnataka Excise Act, 1965, which authorizes it to frame rules regarding the grant of licences, including specifying the classes of persons eligible to receive such licences. It argued that the amended rules were well within this statutory framework.
A central plank of the State’s argument was that liquor licences are granted for a fixed term, typically one year, and do not confer any vested right to renewal. The State contended that renewal is not an automatic process but is subject to the rules in force at the time of renewal.
The State further argued that the introduction of e-auctions was a policy decision aimed at ensuring transparency, fairness, and maximization of revenue. It submitted that such measures are essential for effective governance and fall within the executive’s domain.
Addressing the allegation of excessive delegation, the State contended that there was no sub-delegation in the true sense, as the power to determine reservation norms remained with the State Government itself. Therefore, there was no question of uncontrolled or unguided delegation.
The State also defended the classification under Article 14, arguing that different categories of licences serve different purposes and can be governed by distinct rules. The classification, it submitted, was reasonable and based on intelligible differentia.
Finally, the State emphasized the presumption of constitutionality that attaches to legislative and subordinate legislative instruments, arguing that the burden of proving invalidity lay on the petitioners.
Court’s Judgment:
The Karnataka High Court delivered a comprehensive judgment, addressing each of the petitioners’ contentions and ultimately upholding the validity of the amended rules.
At the outset, the Court clarified the nature of liquor licences, holding that they are granted for a fixed term and do not confer any indefeasible or vested right to renewal. The Court emphasized that the right to renewal depends on the rules prevailing at the time of renewal, not on those existing at the time of the original grant.
Relying on the precedent in State of Kerala v. B. Six Holiday Resorts (P) Ltd., the Court reiterated that no applicant can claim a vested right to a liquor licence and that applications must be decided based on the rules in force at the time of consideration.
The Court further held that the trade in intoxicants is a state privilege and not a fundamental right. Drawing from constitutional principles and precedents such as Kuldeep Singh v. Government of NCT of Delhi, it observed that the State has wide discretion in regulating such activities, including the power to determine the manner in which licences are granted.
Addressing the challenge to Rule 5, the Court found that the provision enabling e-auctions and reservation norms was within the scope of the State’s rule-making power under the Excise Act. It held that the Act expressly permits the State to specify the classes of persons eligible for licences, thereby validating the reservation framework.
On the issue of excessive delegation, the Court rejected the petitioners’ argument, noting that the power to determine reservation norms remained with the State Government itself. Since the delegatee and sub-delegatee were effectively the same entity, there was no question of uncontrolled delegation.
The Court also upheld Rule 5A, clarifying that it does not cancel existing licences but merely curtails the right to renew lapsed licences. It held that if the rules can provide for renewal, they can also impose conditions or restrictions on such renewal.
With respect to Article 14, the Court held that the classification of licences into different categories was reasonable and did not violate the principle of equality. It observed that different types of licences serve different purposes and can be governed by distinct regulatory frameworks.
The Court emphasized the presumption of constitutionality that attaches to subordinate legislation and held that the petitioners had failed to demonstrate that the amended rules were ultra vires or arbitrary.
Accordingly, the Court set aside the Single Judge’s interim stay and allowed the writ appeal, permitting the continued operation of the amended rules. However, it clarified that certain aspects of the challenge would be examined in detail during the final hearing.