SPENCER & CO.

STATE OF MYSORE & OTHERS April 27, 1971

[S. M. SIKRI, C. J ., G. K. MITTER, C. A. VAIDIALINGAM,

P. JAGANMOHAN REDDY AND I. 0. DUA, JJ,] City of Bangalore Municipal Corporation Act, 1949 as amended by City of Bangalore Municipal Corporation Act, 1964, ss. 98, 99 and 100- Levy of property tax-Vacant land taxed at uniform rate on niarket value of land-Provisions whether discriminatory-Whether procedure in s. 98 relating to levy of new tax ought to have been followed.

The appellant company owned a hotel at Bangalore.

The vacant land apppurtenant to the building was used for the beneficial enjoyment of the building as gardens and lawns. Under s. 99(2) (b) of the City of Bangalore Municipal Corporation Act, 1949 as amended in 1964 land appurtenant to a building not exceeding thrice the area occupied by the building was to be taxed as a part of the building, land in excess of that limit was to be taxed at a uniform rate of 0.4 per cent of its market value.

A notice was issued to the appellant on March 20, 1966 demanding tax on the vacant land in excess of thrice the area occupied by the hotel building.

The appellant challenged the levy in the High Court but its petition under Art. 22.6 was dismissed.

In this Court the questions that fell for considerations were: (i) whether for the reasons canvassed by the appellant the tax was discriminatory; (ii) whether the levy was invalid on the ground that the procedure in s. 98 for the levy of a new tax bad not been folldwed.

HELD: (i) The Act is not discriminatory. The scheme of the Act is that the market value of the land is first ascertained and then the tax at 0.4 per cent is levied. Under sub-s. (3) of s. 99 the Commissioner has to determine the market value of the land and sub-s. (3) of s. 100 gives guidance as to how to determine the market value of the land.

The expressions •estimated value' and the word 'area' in s. 100(3) are not vague. In the context of determining the market value of the land, which has a well-known connotation the Commissioner is directed to look at the lands in the area of the land which is being assessed.

In the context he can only look at land~ which are similarly situate and are imilar in nature to the lands being assessed, and the area must mean the locality in which the land is situate and the extent of the locality would be determined by the well-known characteristics such as commercial area, residential area or factory area etc. In other words the sub-section is drawing the attention of the Commissioner to the well-known principle, which is followed in assessing the market value, that lands similarly situate and of similar potentiality should be taken as exemplars.

(ii) This Court has held that the State legislatures have power to levy property tax by assessing the market value of it and levying a percentage on it. If all lands are assessed to the same rate of taxation it cannQt be held that there is per se any discrimination.

Maret value of land always bears a definite relationship to the actual or potential income being derived or derivable from the . land and there cannot be any obji; ction to a levy at uniform rate on market value. Moopil Nair's case where no attention was paid at all to income of th:C land was therefore distinauishable.

SPBNCBR & CO. v. MYSORB (Sikri, C.J.)

K11nnathat Thathunni Moopil Nair v. State of Kera/a, [1961] 3 S.C.R. 77, 91 and State of Kera/a v. Haii K. Kutty,

(1969) I S.C.R. 645, dis tinguished.

(iii) No discrimination can be said to result from the fact that land appurtenant to a building not exceeding thrice the area occupied by such building bas been treated as a part of the building and taxed as such whereas land in excess of thrice the area of a building and other lands not appurtenant to buildings have been classified separately. In cities like Bangalore where land is scarce, excessive use of land as gardens and grounds is not in the public interest arid the legislature can validly tax the excess land on a different and higher basis.

It may in a particular case cause hardship but the legislature carinot be denied the right to clasw sify the lands in such a manner.

Three times the area occupied by a building is not a small area and it cannot be held that this figure is not reasonable.

It was not necessary to specify as to which land would be treated as surplus because the idea is to tax the excess land being used for a particular building and such land would be located in a block.

(iv) It was not necessary to have followed the procedure in s. 98 of the Act to levy the impugned tax. The lands were being assessed to pro perty tax even before the 1964 Act eithr separately or as part of the building. It could not be said that the tax was being imposed for the first time within the meaning of s. 98.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1852 of 1967.

Appeal by special leave from the judgment and order dated

March 28. 1967 of the Mysore High Court in Writ Petition No.

E 704 of 1966.

R. B. Datar, for the appellant.

A. R. Somnath Iyer and S. P. Nayar, for respondent No. 1.

Ramr.<hwar Nath, for respondent No. 2.

The Judgment of the Court was delivered by

Sikri, C, J. This appeal by special leave is directed against the judgment of the High Court of Mysore dismissing the prayer for a declaration of the invalidity of s. 99(2)(b) of the City of Bangalore Municipal Corporation Act, 1949-hereinafter referred G to as the Corporation Act--as amended by the City of Bangalore Municipal Corporation (Amendment) Act, 1964--::hereinafter referred to as the 1964 Act.

By its judgment dated March 28, 1967 the High Court gave a limited relief to the appellant in respect of the notice No. 4606 dated March 31, 1966 issued by the Assistant Revenue Officer, H Corporation of Benglore, to the appellant and quashed it to the extent it related to the period anterior to the date of notice.

SUPREME COURT REPORTS [1971] SUPP. s.c.R.

A The following points were urged before the High Court :

"(1) The new provision, section 99(2)(b) of the Corporation Act. introduced by the amending Act is beyond the legislative competence of the State Legislature.

(2) The said provision is violative of the fundament&l rights of the petitioners guaranteed under Articles 14 and 19(1)(f) of the Constitution.

(Note : The case of alleged violation of Article 19 (l)(f), it is conceded, is not available to the petitioner in writ Petition 704 of 1966 which is an incorporated Company.)

(3) The Corporation has omitted to observe the procedure prescribed by section 98 of the Corporation Act, and cannot therefore levy the ta.x."

Two other points were raised with which we are not concerned.

The learned counsel for the appellant, in view of our decision in Assistant Commissioner of Urban Land Tax v. The Buckingham & Carnatic Co.,(') has not pressed point No. 1 before us. In order to appreciate the other points it is necessary to set out a few facts.

The appellant company are the proprietors of the West End Hotel, Race Course Road, Bangalore. The premises of the hotel comprises a total extent of 19.43 acres or 11,19,168 sq. ft. out of which the building area is 1,05,683 sq. ft. The entire vacant land, excluding the built area and appurtenant thereof is being made use of for the beneficial enjoyment of the building in the area as garden and lawns.

Pursuant to the powers conferred upon the Municipal Corporation of Ba.ngalore under the Corporation Act, as amended by the 1964 Act, to levy tax on the basis of estimated market value of lands, a notice was issued to the appellant on Ma.rch 30, 1966 demanding a sum of Rs. 35,717.20 as tax on vacant land. It was stated in the notice tha.t the vacant land, over and above the limit, measuring 89,293 sq. yds. is assessed at 0.4% of the market value, plus Education Cess, plus Health Cess with effect from April I, 1965. Property tax was also demanded on the building of the hotel but no question arises in this case as to its validity. The High Court expressly stated that they were excluding from consideration in this case all contentions of the appellant relating to property tax on buildings, and the appellant Wllll

(I) (1970) I S. C. R. 268.

left to pursue his normal remedies under the Corporation Act regarding the property tax on buildings.

Objections were filed on behalf of the appellant before the O>mmissioner. The appellant a.lso filed a writ petition under art. 226 of the Constitution challenging s. 99(2)(b) of the Corporation Act, as amended by the 1964 Act, as unconstitutional .and void and prayed for other consequential reliefs.

We may now set out the relevant provisions of the Corporation Act, a.s amended by the 1964 Act. Part III Chapter V of the Corporation Act deals with taxes.

Section 97 enumerates taxes and duties which the Corporation may levy and one of the taxes enumerated therein is "a property tax".

Section 98()) r~ quires that before the corporation pa.sses any resolution imposing a tax or duty for the first time it shall direct the commissioner to publish a notice in the Official Gazette and fix a reasonable period not being Jess than one month from the date of publication for submission of objections.

The sub-section further provides tha.t the Corporation may after considering the objections, if any, received within the period specified, determine by resolution to levy the tax or duty and such resolution shall specify the rate at which, the date from which and the period of levy, if any, for which such tax. or duty shall be levied. Sub-s. (2) of s. 98 provides that "when the corporation shall have determined to levy a.ny tax or duty for the first time or at a new rate, the commissioner shall forthwith publish a notice in the manner laid down in sub-section ()) specifying the date from which, the rate at which and the period of levy, if any, for which such tax or duty shall be levied." Sub-sections (3) and (4) are not relevant for our purpose.

Section 99()) reads a.s under:

"If the corporation by a resolution determines that a property ta.x shall be levied. such tax shall be levied on all buildings and lands within the city save those exempted by or under this Act or any other law."

sub-section (2) of s. 99, provides :

"(2) S&ve as otherwise provided in this Act, the property tax shall be levied,-

(a) in the case of btiildings at such percentages, not being less than ten per cent and not more than twenty per cent of the annual value of such buildings as may be fixed by the Corporation :

.Provided that the percentage to be fixed may be different for different classes of buildings.

S\]PRBMB COURT RBPORTS [1971] SUPP. s.c.R.

(b) in the case of any land at 0.4 per cent of the

market value of the land :

Provided that the tax levied on any such land shall not be less than rupees ten per annum.

Explanation.-For purposes of this section, 'buil ding' includes any land appurtenant to such building used as garden and grounds for the more beneficial en joyment of such building, not exceeding thrice the area occupied by such building."

Sub-section (3) of s. 90 reads :

"(3) For the purposes of assessing the property tax the annual vailue of any building or the market value of the land shall be determined by the Commissioner :

Provided that the annual value of any building or the market value of the land the tax for which is pay able by the commissiiiner shaill be determined by the mayor."

Section 100(1) provides that every building shall be assessed together with its site ahd other adjacent premises occupied as appurtenances thereto unless the owner of the building is a different person from the owner of such site or 1 ·emises. Sub- . section (2) of s. 100 provides: ·

"The annual value of ai building shall be deemed to be the gross annual rent at which such building may at the time of assessment reasonably be expected to let from month to month or from year to year, less a deduction of 16! per cent of such annuail rent and th~ said deduction shall b'e in lieu of all allowance for repairs or on any other account whatever ...... (proviso omitted)."

Sub-section (3) provides that "the market value of lands shall be determined in accordance with the estimated value at the time of assessment of such lands in the area in which such lands are situate."

It is contended that the tax on vacant land is violative of Art. 14 of the Constitution because (i) it is levied at an averagerate without any relation to the actual or potential income of the land; (ii) the mainner of determining the market value was discriminatory, and (iii) the classification of vacant land and land appurtenant to a building is discriminatory. The learned coun-· eel relied rm the decision of this Court irr Kunnathat Thathunni'

Moopil Nair v. The State of Kera/a('). It will be remembered A that the charging section in that case was s. 4 of the Travancore Cochin Land Tax Act, 19SS, which read as follows :

"4. Subject to the provisions of this Act, there sh"ll be charged and levied in respect of all lands in the State, of whatever description and held under whatever tenure, B a uniform rate of tax to be called the basic tax."

Our attention wa.s drawn to the following passage in Chief Justice Sinha's judgment :

"It is common ground that the tax, assuming that C the Act is really a taxing statute and not a confiscatory measure, as contended on behaH of the petitioners, has no reference to income, either actual or potential. from the property sought to be taxed ......... Ordinarily, a tax on land or land revenue is assessed on the actual or the potential productivity of the )Mid sought to be taxed.

D In other words, the tax has reference to the income ac tually made, or which could have been made, with due diligence, and, therefore, is levied with due regard to the incidence of the taxation. Under the Act in question we shall take a hypothetic"! case of a number of persons owning and possessing the same area of land. One makes nothing out of the land, because it is arid desert.

The second one does nor make any income, but could raise some crop &fter a disproportionately large invest ment of labour and capital. A third one, in due course of husbandry, is making the land yield just enough to pay for the incidental expenses and labour charges be r sides land tax or revenue. The fourth is m"king large profits, because the land is very fertile and capable of yielding good crops. Under the Act, it is manifest that the fourth category, in our illustration, would easily be able to bear the burden of the tax. The third one m"y be able to bear the lax. The fltst and the second one will have to pay from their own pockets, if they could G afford the tax. If they cannot afford the tax, the pro

perty is liable to be sold, iii due process of la.w, for realisation of the public demand. It is clear, therefore, that inequality is writ large on the Act and is inherent in the very provisions o! the taxing section. It is also clear that there is no attempt at classification in the pro- H visions of the Act."

(1) [1961) 3 S. C.R. 77, 91.

!0.8

SUPREME COURT RBPOB.TS [!971] SUPP. s.c.R.

We are unable to hold that the impugned Act is discnmtnatory. The scheme of the Act is that the market value of the land is first ascertained and then taix at 0.4 per cent is levied.

Under sub-s. (3) of s. 99 the Commissioner has to determine the urged by the learned counsel that the expression "estimated as to how to determine the market value o~ the land. It was urged by the learned counsel that the expression "estimated value" and the wotd "area" are very vague.

We are unable to agree with him in this respect.

In the context of determining the market value of the land, which has a well-known connotation, the Commissioner is directed to look at the lands in the area of the land which is being assessed. In the context he can only look at the lands which are similarly situate, a.nd are similar in nature to the lands being assessed, and the area must mean the locality in which the land being assessed is situate and the extent of the locality would be determined by the well-known characteristics such as commercial area, residential area or factory area, etc. In other words the sub-section is dra.wing the attention of the Commissioner to the well-known principle, which is followed in assessing the market value, that lands similarly situate and of similar potentiality should be taken as exemplars.

The next question that arises is whether fixing property tax at 0.4 per cent is itself discriminatory.

We are unable to see how this is discriminatory.

This Court has held that the State legislatures have power to levy property ta.x by assessing the market value of it and levying a percentage on it. If all lands are assessed to the same rate of .taxa.tion we are unable to see how there is per se any discrimination. The facts in Kunnathat Thathunni Moopil Nair v. The State of Kerala(') were quite different.

There no a.ttention was paid at all to the income of the land. Here it is true that income of the land is not taken into consideration and instead market value is the basis of taxation. But market value of land always bears a definite relationship to the actual or potential income being derived or derivable from the land and there cannot be any objection to a levy at tmiform rate on the market va.lue.

Reference was made to the decision of this Court in State of Kerala v. Haji K. Kutty('). There the facts were again quite different. The legislature adopted the floor-area of the building as the basis of tax irrespective of all other consideration.

The market value of the property stands on a different footing because, like income, the market value of property is one of the indices of the benefit which the owner denves or can derive from It and the very concept of market value takes into account the present or the potential income and other releva.nt considerations.

(!) [19611 3 S. C. R. 77.

(2) (1969) I S. C.R. 645

It was next contended that the classification of vacant land is discriminatory. While land appurtenant to a building used a& garden and as grounds for the more beneficial enjoyment of such building, not exceeding thrice the area occupied by such building, has been treated as a part of the building and taxed as such, }!j.nd in excess of thrice the area of a building and other lainds

not appurtenant to buildings have been classified separately. The learned counsel said that the distinction is artificiail as the land in excess of thrice the area of a building is also being used for the same beneficial enjoyment of the building. It seems to us that in cities like Bangalore, where land is scarce, excessive use of land ru; gardens and grounds is not in the public interest and the legislature can validly tax the excess land on a different and higher basis. It may in a particular case cause hardship but the legislature cannot be denied the right to classify the lands in such a manner. Three times the area occupied by a building

- is not a mall area and we are unable to hold that this figure is not reasonable.

It was said that the Act did not give any indicaition as tp which land would be treated as surplus but in our view it is not necessary to specify the lands because the idea is to tax the excess land being used for a pacticular building and as this land would be located in a block It was not necessary to specify the land.

The last point urged before us was that this was a new tax and the procedure prescribed in s. 98 should haive been followed.

We are unable to hold that it is a new tax. Tax was being levied before the 1964 Act. The lands were being assessed to property tax even before the 1964 Act, either separately or as part of the building. We cannot say that this tax is being imposed for the first time within the meaning of s. 98.

In the result the appeal fails and is dismissed but in the circumstances there will be no order as to costs.

G.C.

Appeal dismissed.

50~

Ill

SPENCER & CO

STATE OF MYSORE & OTHERS

S. M. SIKRI

G. K. MITTER

P. JAGANMOHAN REDDY

I. 0. DUA, JJ

ss. 98, 99 and 100

s. 98

s. 99(2)

Art. 22

s. 98

s. 99

s. 100

s. 100(3)

[1961] 3 S.C.R. 77

s. 98

s. 98

s. 99(2)(b)

section 99(2)(b)

Articles 14 and 19(1)(f)

Article 19

section 98

art. 226

s. 99(2)(b)

Section 97

Section 98()

s. 98

Section 99()

s. 99

s. 90

Section 100(1)

s. 100

Art. 14

s. 4

[1961) 3 S. C.R. 77

s. 99

s. 98

s. 98


~10

INDIAN AIRLINES CORPORATION

SUKHDEO RAI

April 27, 1971

[J. M. SHELAT, 1'. D. DUA AND V. BHARGAVA, JJ.]

Air Corporation Act, 1953-Sections 44, 45-Regulation framed under the Act providing terms and conditlom of service of employees- Termination of service in breach of regulations-Relationship between Corporation and its employee~ that of master and servant-Therefore, only entitled to damages. C Regulations-Framed under Air Corporation Act, 1953-Stalu.J of.

Master and &; vant-Employees of statutory corporation-Regulations framed under statute only embody terms and conditiom of service.

The appellant is a Corporation set up under the Air Corporation Act, 1953.

The Act authorises the corporation to appoint officers and other employees and make regulations providina the terms and conditions of service of such officers and employees.

The respondent employed as a motor driver was dismissed from the service of the Corporation in breach of the procedural safeguards provided under the regulations. He filed a suit for a declaration that the dismissal was illegal and void, The trial court granted the declaration.

On appeal the High Court affirmed the decree holding that the Corporation was under a statutory obligation to observe the procedure laid down in the regulations and that not having been done the order of dismissal was illegal and void and the respondent continued to be in the employment of the Corporation as if there was no termination of service.

On the question whether the declaration siven by the trial court and upheld by the High Court could be granted,

HELD: (1) When there is a purported termination of a contract of service, a declaration that the contract of service stili subsisted would not be made in the absence of special circumstances, because of the principle that courts do not ordinarily grant specific performance of service.

This is so, even in cases where the authority appointing an employee was acting in exercise of statutory authority. The relationship between the person appointed and the employer would, in such cases, be contra ctual i.e., as between a master and servant, and the termination of that relationship would not entitle the servant to a declaration that his employment had not been validly determined. [512H]

Francis v. Municipal Councillors of Kuala Lumpur, [1962] 3 All E.R. 633, Barber v. Manchester Regional Hospital Board, [1958] 1 All E.R. 322 and Ridge v. Baldwin, [1964] A.C. 40, referred to.

But the court would grant a declaration of nullity where the action complained of is ultra vires or where the appointment is to an office or status. [513E-F]

Vine v. National Dock Labour Board, [1957] A.C. 488, Boot Chand

v. The Chancellor, [1968] 1 S.C.R. 434 and Vidyodaya University v. Silva, [19641 3 All E.R. 865, referred to.

t.A.c. v. SUKHDEO RAI (She/at, J.) 511

{ii) The fact that the appellant Corporation was one set up under and A was regulated by a statute would not take away, without anything more; the relationship between the Corporation and its employees from the category of purely master and servant relationship. [514E]

Vidyodaya University v. Silva, [1964] All E.R. 865 and Dr. S. B. Dutt

v. University of Delhi, [19.59] S.C.R. 1236, referred to,

(iii) The employment of the respondent is not one to an office or B -status and neither the Act nor the rules made under s. 44 by the Central Government lay down any obligation or restriction as to the power of the •Corporation to terminate the employment of its employees or any procetdural safeguards subject to which only such power could be exercised.

,[516E]

(iv) This Court has held that there are only three well-recognised exceptions to the general rule under the law of master and servant where C a declaration would be issued, viz .• (i) cases of public servants falling under article 311(2) of the Constitution; (ii) cases falling under the industrial law and (iii) cases where acts of statutory bodies are in breach of a mandatory obligation imposd by a statute.

[517B]

S. R, Tewari v. District Board, Agra, (1964] 3 S.C.R. 55, Bank of Baroda v. Mehrotra, [1970] 2 L.L.J. 54, Ram Babu Rathaur v. Life lnurance Corporation. A.I.R. 1961 All. 50:!, Life Insurance Corporation v, D N. Banerjee, [1971] 1 L.L.J. 1, Dr. Gupta v. Nathu, [1963] 1 S.C.R, 721, Kruse v. Johnson, [1898] 2 Q.B.D. 91 and Rajasthan State Electricity Board

(v) Though made under the power conferred by statute, the regulation~ merely embody the terms and conditions of service in the Corporation but do not constitute a statutory restriction as to the kind of contracts which the Corporation can make with its servants or the grounds on which it can terminate them. That being so, ancl the Corporation having undoubtedly power to dismiss its employees, the dismissal of the respondent was with jurisdiction and although it was wrongful in the sense of its being in breach of the terms and conditions which governed the relationship

between the Corporation and the respondent, it did subsist. [5:!00]

(vi) The present case, therefore, did not fall under any of the three well-recognised exceptions laid down by this Court; hence the respondent was only entitled to damages and not to the declaration that his dismissal

was null and. void. [520E]

CiviL APPELLATE JURISDICTION: Civil Appeal No. 1171 of 1967.

Appeal from the judgment and decree dated September 27, 1966 of the Calcutta High Court in Appeal from Appellate Decree No. 195 of 1964.

G. B. Pai, 0. C. Mathur, J. B. Dadachanji, C. S. Sreenivasa

Rao and Bhajan Ram Rakhini, for the appellant. H

Urmila Kapoor, lanardan Sharma and R. K. Khanna, for respondent.

.....

SUPRBMB COURT REPORTS

[1971] SUPP. S.C.B..

The Judgment of the Court was delivered by

Shelat, J.-Prior to August 1953, the respondent was employed as a motor driver in Airways (India) Ltd. On the passing of the Air Corpora, tion Act, XXVII of 1953, and consequent thereupon of the taking over of the existing air companies, including the Airways (India) Ltd., by the appellant-Corporation. he became the employee of the appellant-Corporation. On January 13, 1956, he wae suspended on certain charges. On being found guilty of those charges after an enquiry had been held. he was dismissed by an order dated February 6, 1956.

The respondent filed a suit alleging that the enquiry had been conducted in breach of the procedure la, i!; I down by the Regulations made by the Corporation under sec. 45 of the Act. and that therefore, the dismissal was illegal and void. The Trial Court accepted the contention and granted 31 declaration that his service continued as the order dismissing him was null and void.

That decree was. upheld by the first appellate court. In a second appeal in the High Court, it was conceded that the Regulations applied to the respondent's case, and that the procedure therein laid down for terminating his service 'was nbt complied with.

The Corporation's contention, however, was that the only relief • to which the respondent wae entitled to was damages and that a declaration, such as the one granted by the Trial Court, could not be given. The High Court rejected that contention holding that the Corporation was under a statutory obligation to observe the procedure la, id down in the Regulations, and that that not having been done, the order of dismissal was illegal and void.. and the respondent continued to be in the employment of the Corporation as if there was no termination of service. This appeal,. founded on a certifica, te granted by the High Court, is directed against its aforesaid judgement and decree.

It being an admftted fact that the respondent's service was terminated in breach of the procedur&l safeguards provided in the Regulations, the question for determination iS1 whether in cases, such as the one before us, a declaration given by the Trial Court and upheld by the High Court could be granted.

It is a well settled principle tha, t when there is a purported termination of a contract of service, a declaration, that the contract of service still subsisted, would not be made in the absence of special circUlllstances becawe of the principle that courts do not ordinarily grant specific performance of service. This is so, even in cases where the authority appointing an employee was acting in exercise of statutory authority. The rel31tionship between the person appointed and the employer would in such cases

J .A.C. V. SUK, HDBO RAI (She/at, J.) 5U

be contractual. i.e.. as between a master and servant, &nd the terminatioa of that relationship would not entitle the servant to a declaration that his employment had not been validly determined. (see A. Franci.! v. Municipal Councillors of Kuala Lumpur (I) and Barber v. Manchester Regional Hospital Board (~.

"Cases of dismissal fall into three cl31Sses", said Lord Roid in Ridge v. Baldwin, (') firstly, dismissal of a servant by his master, secondly, dismissal from office hei.d during pleasure, and thirdly, dismissal from office where there must be something a-gainst a man to warrant his dismissal. It is in the third category of cases that an employee cannot be dismissed without first letting him know what is alleged against him and hearing his defence or explanation. He added thatt in a case of purely master and servant relationship, the servant is not entitled to say that he was ; J.Ot heard by his master before his dismissal.

Such a question of being hea.rd or not can only arise where the authority employing the servant is under some statutory or other restriction as to the kind of contract which it can make with its servants or the grounds on which it can dismiss them.

The question, therefore, would be whether the relationship between the Corporation and the respondent was any thing else than that of master and servant, or whether the Corporation was under some statutory limitation or obligation by reason of which it could not termin<~te his service except by complying __ with such an obli

gation. The decision in Vine v. National Dock Labour Board (') illustrates a case where the court would grant a declaration of nullity. That WliiS a case of lack of power in the Board to delegate its disciplinary function to a committee which dismissed the employee-an action which was held ultra vires, and therefore, a nullity.

A similar consequence also follows where the appointment is to a.n office or status, such as the vice-chancellorship of a university, as was the case in Bool Chand v. The Chancellor ('), where this Court held that the tenure of office held by the appellant could not be terminated without informing him of the a-llegations made against him and without hearing him or giving him an opportunity to give an explanation.

There is, on the other hand, the case of Vidyodava Univerv sity v. Silva (') where a teacher appointed by the University was found not to be holding such an office or status and where it was held that the University, though established under a statute, was under no statutory obliga-tion or restriction, subject to which only it could terminate the service of the teacher. The service

(1) [1962]3 All E.R. 633.

(3) {1964] A.C. 40 at 65.

(5} [I96S]t s.c.R. 434.

33-1S.C.Indiaf71

(2} [1958)1 All E.R. 322.

(4) (1957] A.C. 488.

(6) [196413 Ali B.R. 865.

SUPREME COURT REPORTS

(1971] SUPP. S.C.R..

oi the respondent was brought to an end by a resolution of the University Council set up under the statute establishing the University. The resolution was admittedly passed without hearing the teacher. Under the statute, the Council was empowered to institute professorships &nd every appointment was to be by an agreement in writing between the University and the professor and was to be for such period and on such terms as the Council might resolve. Under sec. 18(e) of the Act, the Council had the power to dismiss an officer or a teacher on grounds of incapacity or conduct which in the opinion of nQt less than two-thirds of the members of the Council rendered him unfit to be an officer or a

teacher of the University. Such a resolution with the requisite majority was passed. The Act gave no right to the teacher of being heard by the Council.

The Privy Council held that the mere circumstance that the University was established by the statute and was regul<~ted by statutory enactments contained in the Act did not mean that the contracts of employment made with teachers, though subject to sec. 18(e), were other than ordi nary contracts of master and servant, and therefore, the procedure of being heacd invoked by the respondent was not available to him and no writ could be issued against the University. (see also Dr. S. B. Dutta. v. University of Delhi (1) The fact, therefore, that the appellant-Corporation was one set up under and was regulated by Act XXVII of 1953 would not take aW&y, without anything more, the relationship between it and its employees from the category of purely master and servant relationship.

Are there then in the Act any provisions which impose upon the Corporation any statutory restriction or obligation which limits its power of terminating that relationship?

The Act was passed to facilitate acquisition by the Air Corporations of undertakings belonging to certain existing air compa;- nies and to make further and better provisions for the operation of air transport services. By sec. 3, two corporations, the Indian Airlines and Air India International, were set up as bodies corporate, having perpetual succession.

Sec. 8(1) provides that for purposes of discharging its functions under the Act each of the corporations shall appoint a general mana.ger and subject to such rules as may be prescribed in this behalf may also appoint such number of officers and employees as it may think necessary. Its second sub-section provides that :

"Subject to the provisions of section 20, every person employed by each of the Corporations shall be subject to such conditions of service and shall be entitled to such remuneration and privile~?:es as may be determined

(1) [l9S9]S.C.R.1236, at 1244.

I.A.C. V. SUKHDEO RAI (She/at, J.} 515

by regulations made by the Corporation by which he :A is employed." ·

Sc. io provides that:

. "Every officer or other employee of an existing air

companyemployed by that company prior to the first day of July, 1952, and stilt in its employment immediately bef~:>re the appoi..rited da.te shall-become as from the appointed date an officer or other employee, as the case may be, of the Corporation in which the undertaking has vested and shall hold his office or service therein by "the same tenure, at the sa.me remuneration and upon . the same terms and conditions and with the same rights and privileges as to pensions and gratuity and other. at ters as he would have held the same under. the eXIsting air company if its undeaking had not vested in the. Co~

poratiort and shall contmue to do so unless and until h1s

mployment in the Coi:poration is terminated or until his rem11neration, terms or conditions are duly altered by the Coi:poration."

Sei:. 44(1) empower~ the Centrai Government to make rules to give effect to the provisions _of the . Act and sul>-s. (2) thereof empowers it, in particular and without prejudice to the generality of that power, to make rules, inter alia, providing the . terms and conditions of service of the general manager and such other categories of officers as may be specified from time to time under s. 8(1). Sec. 45 authorises each of the two Ccirpora.tioris with the approval of the Central Government and by notification in

th~ Government gazette . to make regulations not inconsistent wtth the Act or the rules made under s: 44 "for the administration of the affairs of the Corpora.tion and for carryino out its

functios" and in particular providing the terms and cnditions of scrv1ce of officers and other employees of the Corporation

othr than the gecral manager and officers of any other categones referred to m s. 44.

. . Te effect of these_ provisions,. briefly, is, (l) that sec. 8(1) authonses the Corporatton to appomt officers and other emp-- ~~; es, (2) that under s. 8(2) the Corporation is empowered. sub- !ucb to s. 20, to lay down the terms and conditions of service ot made offi'Jrs and employees as it may determine by regulations a.nd ed:ocr s. 45, and . (3.> tha.t by virtue of s. 20 the officers were tak yees of the cJusting aJr companies, whose undertakings of the At" t~er by the Corporations, became, by the operation .

undcrtakig employees of the Corporation in whom a particular was vested. The section ensures that on . their so

I r

SUPRI3ME COURT REPORTS [1971] SUPP. S.c.R.

becoming the employees of the Corporation they would be gover ned by the same terms and conditions of service by which they were governed immedia.tely before the appointed date until the Corporation altered those terms and conditions by regulations.

The power to appoint its employees, except to the extent of th.~

employees of the existing air companies becoming by operation of s. 20 its employees, is vested in each of the two Corporations.

Each of them has also the power to lay down the terms and conditions of service of its employees by regula.tions and thereby even alter the terms and conditions, which those who became by operation of law its employees had in their respective existing companies, and which, until :Su¢h alteration, were ensured to them.

Indeed, the power of the Corporation to terminate the employment of its officers and other employees was no where disputed: the only dispute raised was as to the manner in which it could be exercised. It is necessary to observe in this connection that neither the Act nor the rules made under sec. 44 by the Central Government lay down any obligation or restriction as to the power of the Corporation to terminate the employment ot' its employees or any procedural safeguards, subject to which only, such power could be exercised. The reason is that under the scheme of the Act such procedural eguards and other terms and conditions of service were to be provided for in the regulations made by the Corporation under sec. 45.

The employment of (the respondent not being one to an office or status and there being no obligation or restriction in the Act or the rules subject to which only the power to terminate the respondent's employment could be exercised, could the respondent contend that he was entitled to a. declaration that the termination of his employment was null and void?

A case of an analogous nature arose in U. P. State Ware housing Corporation Ltd. v. Tyagi. (1) The Agricultural Produce (Development and Warehousing) Corporation Act, XXVIII of 1956, with which the Court there was concerned, provided for the incorporation and regulation of corporations for development and warehousing of agricultural produce on cooperative princi

ples. Sec. 28 empowered Sta.te Governments to set up such cor porations.

Sec. 52 authorised the appropriate Government to make rules and ss. 53 and 54 gave power to the Board set up under the Act and the corporations respectively to make regula tions consistently with the provisions of the Act and the rules.

The respondent there was dismissed from service without following the procedure laid down in regulation 16(3). There was no

<lJ [t970]2 s.c.R. zso.

I.A.C. v. SUKHDBO RAI (Shelat, J.)

question or doubt about the power of the Corporation to terminate his service. The question. w~. whether a declaration to the effect that the termination was invalid and void on the ground of non-compliance of regulation 16(3), could be granted in the &uit filed by the respondent.

This Court. after examining a number of decisions, followed the decision in S. R. Tewari v.

District Board Agra (1) which laid down that there were only three well recognized exceptions to the general rule under the law of master and servant where such a declaration would be issued, namely, (1) cases of public servants falling under Art. 311(2) of the Constitution, (2) cases fclllling under the industrial law, and (3) cases where acts of statutory bodies are in breach of a mandatory obligation imposed by a statute. and held tbt

the case before it did not fall under any one of the said three exceptions, that the dismissal was wrongful inasmuch it was in breach of the terms and conditions of employment embodied in the regulations and not one of breach of a statutory restriction or obligation, subject to which only the power to terminate the relationship depended. (see also Bank of Baroda v. Mehrotra {l) In S. R. Tewari's case (1) this Court noticed with approval the decision of the High Court of Allahabad in Ram Babu Rathaur v. Life Insurance Corporation (') that though the Corporation was a statutory body, the relations between it and its employees were governed by contract and were of master and servant and not subject to any statutory obligation although the Corporation had framed under its power under the Act regulations containing conditions of service in the Corporation.

A similar view bas recently been taken by the High Court of Calcutta in Life Insurance Corporation v. N. Banerjee (1).

Counsel for the respondent, however, sought assista.nce from the decision in the Life Insurance Corporation of India v.

Mukherjee ('). That decision is clearly distinguishable and can, therefore, give no assistance.

Prior to the passing of the Life Insurance Corporation Act, 1956 the respondent there was 31n

employee of one of the insurance companies taken over under the Act. Under his contract of employment, his service was liable

to be terminated without notice if he was found guilty ot fraud, misappropriation etc. but w~ entitled to 30 days' notice if it was

terminated for any other reason. His service was terminated admittedly without giving him an opportunity to be heard. With the ns fer of the controlled business from the insurer to the Corporation.

the employees of the former became the employees ot the latter and

(1) {1964]3 S.C.R. SS.

(2) [1970]11 L.LJ. 54. (3} A.I.R. 1961 All. 502.

(4) [1971]1 L.L.J. 1.

(S) [1964]5 S.C.R. 528.

SUPREME COURT RBPORTS

[1971] SUPP. S.C.R.

were governed under s. 11 (1) of the Act by the same terms and conditions as before. But under sec. 11 (2), the Central Governw ment had the power to alter those terms and conditions. Under this power, the Government issued an order reducing the remuneration pa-yable to the development officers and revising their other terms and conditions. a. (10) of this order empowered tbe Corporation inter alia to terminate the services of 'luch an officer, (a) after giving him an opportunity of showing cause, or

(b) without assigning any reason but with the prior approva~ of the Chairman of the Corporation and after giving three months' notice. Cl. (11) of the order provided that the actual pay admissible to an officer would be determined in a-ccordance with the regulations which the corporation would make under the power reserved to it by the Act. It is thus clear that, except for the pay and allowa-nces admissible to an officer, the Order was a self-contained code as regards the other terms and conditions of service including disciplinary action. In the meantime, two circulars had been issued by the managing director which provided that in certa.in circumstances the services of an officer could be terminated. As contemplated by cl.(ll) of the said Order, the Corporation framed regulations under sec. 49 of the Act. Regulation 4(3) incorporated the said circulars as part of the regulations for purposes of determining the pay admissible to and the fitment of the development officers. Thus, the circulars became part of the regulations though when they were issued they were merely administrative in character and without any sanction of the Act The Corporation claimed tha.t under regulation 4(3), which incorporated the said circulars, it had the power to terminate the service of Mukherjee without assigning any reason.

Negativing that contention, this Court held that s. 11 (2) was paramount and would override any provision of the Order passed by the Central Government if it was contrary to it. Next would come the Order and lastly the regulations which were subject to the Act and the Order, and therefore, if the regulations were to be inconsistent with the provisions of s. 11 (2) or the sa.id Order, the regulations would be to that extent invalid. Therefore, even if the regulations provided for termination of services they would have to be read subject to the Order of the Government, and consequently, the order terminating the service of an officer would have to be in consonance with the provisions of the said Order. Couse quently, an order terminating the service of an officer without giving him a.n opportunity of being heard, as provided by cl. (10) of the said Order, would be without power, and therefore, invalid The Court held the impugned dismissal as invalid also for the reason that regulation 4(3) provided for determination of pay and allowances a, nd the fitment of officers in accordance with the principle laid down in the said circulars, and therefore, the service of an officer could not be determined under the guise of

I.A. C. v. SUKHDEO RAI (She/at, J.)

fitment.

That could, therefore, be done only under cl. (10) of the Order and in accordance with the procedure laid down in that clause. The order decllllring the dismissal invalid thus was based on the ground that the regulations and the Order of the Central Government must be read harmoniously and when so read, the Central Government's Order gave power to terminate the service of an officer <lifter following the procedure there laid down, and consequently, the impugned dismissal made inconsistently with the provisions of the said Order was without jurisdiction, and therefore, a nullity. It is clear that this decision was based on different facts and on different principles <lind cannot be legitimately invoked by the respondent. But the decision in Barrot v. S. T. Corporation (1) would seem to support the respondent. There, the order of termination of the appellant's service by the Corporation, a body set up under the Road Transport Corporllltions Act, 1950, was held to be bad in law on account of its being in contravention of cl. 4(b) of the Regulations containing service conditions framed by the Corporation under the power given to it by the Act. But the question whether the said Regulations constituted a statutory obligation subject to which only the power to terminate the employment could be exercised or not, or the question whether they took the employment out of master and servant relationship was not canvassed. -Neither the decision in S. R. Tewari's case (2) nor any other similar decision was also it seems, brought to the notice of the Court.

Nor can counsel derive any aid from the decision in Dr.

Gupta v. Nathu (') where the Court was dealing with a by-law made by the Central Government under powers conferred on it by the Forward Contracts (Regulation) Act, 1952 which compulsorily amended the bye-laws of the association recognized under the Act and which vested certain powers on authorities external to the association. The bye-law in question was not limited in its aprlication to the members of the association but to all those who entered into forward contracts and were governed by its by-laws.

But all rules <lind regulations made by authorities in

pursumce of a power under a statute do not necessarily have the force of law.

In Kruse v. Johnson. (1) while considering the validity of a bye-law made by a country council. Lord Russell described a bye-llllw having the force of law as one affecting the public or some section of the public, imposed by some authority clothed with statutory powers, ordering something to be done or not to be done and accompanied by some sanction or penalty for its non-observance. lt validly made such . a bye-law has the force of law within the sphere of tts

(2) [196413S.C.R. 55.

(4) [1898] 2 Q.B. 91, at 96

(1971] SUPP. S.C.R.

legitimate operation.

The function of uch bye-laws is to suppleent the general law by which the legisla-ture delegates 1ts own power to make them.

In Raiasthan State Electricity Board v. Mohan Lal (1) where this Court held the Board, set up under the Electricity (Supply) Act, 54 of 1948, as a State within the meaning of Art. 12 of the Constitution against which m, andamus could issue under Art. 226, emphasised the fact that the Act contained provisions which empowered the Board to issue directions, the disobedience Olf which was punishable as a penal offence. As observed earlier, under sections 8(2) and 20, the appelllllnt-Corporation has been given the power to employ its own officers and other employees to the extent it thinks necessary on terms and conditions provided by it in regulations made under sec. 45.

The regulations contain the terms and conditions which govern the relationship between the Corporation and its employees. Though made under the power con

ferred by the statute, they merely embody the terms and conditions of service in the Corporation but do not constitute a statutory restriction as to the kind of contracts which the Corporation can make with its servants or the grounds on which it can terminate them. That being so, and the Corporation having undoubtedly the power to dismiss its employees, the dismissal of the respondent was with jurisdiction, nd although it was wrongful in the sense of its being in breach of the terms and conditions which governed the relationship between the Corporation and the respondent, it did subsist. The present case, therefore, did not fall under any of the three well recognized exceptions, and therefore, the respondent was only entitled to damages and not to the declaration that his dismissal was null and void.

In our view, the High Court was in error in upholding the declaration granted by the Trial Court. The appeal by the Cor~ poration, therefore, succeeds and is allowed with the result that the judgment and decree pa-ssed by the High Court is set aside. In the circumstances of the case, however. there will be no order as to cost!.

K.B.N.

(1) [19671 3 S.C.R. 377. '

Appeal allowed.

10

INDIAN AIRLINES CORPORATION

SUKHDEO RAI

M. SHELAT

1'. D. DUA

V. BHARGAVA, JJ.

Air Corporation Act, 1953

Sections 44, 45

[1968] 1 S.C.R. 434

s. 44

article 311(2)

(1964] 3 S.C.R. 55

sec. 45

sec. 18(e)

sec. 18(e)

sec. 3

Sec. 8(1)

section 20

s. 8(1)

Sec. 45

s. 44

sec. 8(1)

s. 8(2)

s. 20

s. 45

s. 20

s. 20

sec. 44

sec. 45

Sec. 28

Sec. 52

ss. 53 and 54

Art. 311(2)

s. 11

sec. 11

sec. 49

s. 11

s. 11

Road Transport Corporllltions Act, 1950

cl. 4(b)

Art. 12

Art. 226

sections 8(2) and 20

sec. 45


.COMMISSIONER OF INCOME-TAX, MYSORE, A

BANGAWRE

THE MYSORE ELECTWCAL INDUSTIUES LTD.

April 27, 1971

[S. M. Snt:RI, C. J., G. K. MITTER, C. A. VAIDIALINGAM,

P. JAGANMOHAN REDDY AND I. D. DUA, JJ.]

Companies (Profits) Surtax Act, 1964-Second Schedule, r. 1-Sums .appropriatrd by towards reserves not on the first day of 'the year but later

-Should be treated a.r effective from the earlier date since divirion of undistributed profits became effectiw from that day.

On the question whether three several sums appropriated by the Directors of the respondent-company towards reserves on the 8th August, 19o3

out of the profits of the year ending 31st March, 1963, should be added to other items for computation of the capital of the respondent as on the 1st day of April, 1963 in terms of rule I of the Second Schedule to the Companies (Profits) Surtax Act, 1964,

HELD: The fact that the directors were unable to appropriate the -sums to reserves of different kinds cannot make any difference to the nature or quality of the appropriation of the profits to reserves as determined by the directors after 1st April, 1963. Their determination to appropriate the sums mentioned to the three s-:prate classes of reserves on the. 8th of August, 1963 must be related to the 1st of April, 1963 i.e. the beginning of the accounts for the new year and must be treated as effective

frm that day. [524D]

Commissiona of lncom~-ta; c, Delhi v. A.ryodya Ginning & J"fanufac- Juring Co. Ltd., 31 I.T.R. 145 and Commissioner of Income-tax v. Vasantfra

Mills Ltd., 32 I.T.R. 237, referred to.

CrvrL APPELLATE JuRISDICTION: Civil Appeal No. 1794 of 1970.

Appeal from the judgment and order dated October 28, 1969 of the Mysore High Court in Tax Referred Case No. 12 of 1967.

Jagdish Swarup, Solicitor-General, A. N. Kirpal and B. D . .Sharma, for the appellant.

M. K. Ramamurthi, J. Ramamurthy and Vineet Kumar, for G the respondent.

S. Swamlnothan and R. Gopalakrishnan, for the intervener.

The Judgment of the Court was delivered by

Mitt", J.-The question involved in this appeal is, whether ; three several sums appropriated by the Directors of the respondent 1owards reserves on the 8th August 1963 out of the profits of the

SUPRBME COURT REPORTS

(1971] SUPP. S.C.R.

year ending 31st March, 1963 should be added to other items for computation of the capital of the respondent as on the 1st day of April, 1963 in terms of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 hereinafter referred to as the 'Act'.

The Act which received the assent of the President on 2nd May, 1964 is an Act to impose a special tax on the profits of certain companies. Under section 4 of the Act a tax known as surtax become chargeable on every company for every assessment year commencing on and from the 1st day of April 1964 in respect of so much of its chatrgeable profits of the previous year as exceeded the statutory deduction, at the rates specified in the Third Schedule. Under s. 2(3) "assessment year" means the period of twelve months commencing on the 1st day of April of every year.

"Chargeable profits" is defined in s. 2(5) as the total income of an assessee computed under the Income-tax Act, 1961 for al]ly previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule. "Statutory de-· ductions", ignoring the provisos, means in terms of s. 2(8) an !llmount equal to 10 per cent of the capital of the company as computed in accordance with the provisions 0£ the Second Schedule or an amount of Rs. 2,00,000/- whichever is greater. The Second' Schedule to the Act contains therules, for computing the capital of a company for the purposes of surtax. Rule 1 of the Second'

Schedule with which alone we are concerned in this section reads :

"Subject to the other provisions conta.ined in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of-

(i) its paid-up sha.re capital;.

(ii) its reserves, if any created under the proviso

(b) to clause (vi-b) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (XI of 1922), or under subsection (3) of section 34 of the Income-tax Act, 1961 (LXIII of 1961)~

(iii) its othr.r reserves as reduced by the amounts credited to such reserves as have been allowed as a deduc

tion in computing the income of the company for the purposes of the lndi!IID Income-tax Act, 1922 (XI of 1922), or the Income-tax Act, 1961 (XLIII of 1961);

(iv) its debentures. if any: and

(v) any moneys borrowed by it from Gvernment or the Industrial Finance Corporation of India or the

C.I.T. v. VYSoPJl BLECT. LTD. (Mitter, J.) 523

Industrial Credit and Finance Corporation of India or A. any other finoocial institution which the Central Government may notify in this behalf in the Official Gazette or any banking institution (not being a financial institution notified as aJoresaid) or any person in a country outside India: Provided that such moneys are borrowed for the B creation of a capital asset in India and the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less th&n seven years.

Explanation.-For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company &Cl on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading "RESERVES Am>· SURPLUS" or of any item under the heading "CURRENT LIABILITIES AND PROVISIONS" in the column relating to "Liabili- D ties" in the "Form of Balance-sheet" given in P&rt I of Schedule VI to the Companies Act, 1956 (I of 1956), shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule ...

In 1Crms of s. 4 of the Act the first assessment year for the purpose of the Act in respect of the company was that commencing on and from the first day of April, 1964. The previous year in respect of which the chargeable profits had to be ascertained commenced on the first of April 1963 and ended on the 31st March,

1964. The capital of the company in terms of rule 1 of the Second Schedule would be its paid-up share capital and inter alia reserves as would come under clauses (ii) and (iii) of rule 1 to the Second Schedule. The reserves in this case to which exception is being taken by the appellant as components of the capital of the company are the following three sums: (1) Rs. 2,56,000 as plant modernisation and rehabilitation reserve; (2) Rs. 1,00,000 as loan redemption reserve, and (3) Rs. 89,557/- as development rebate reserve. These are three of the items of reserve which the directors of the respondent in their report to the general body of the shareholders proposed as appropriations out of the profits of the year ending on 31st March, 1963.

:!'.

The sole contention on behalf of the appell&nt is that these H appropriations having been made on the 8th August, 1963 could not be treated as components of capital "as on the first day of the previous year" i.e. 1-4-1963, in tenns of rule 1 to the Second

SUPRBMB COURT R.BPORT6

[1971) SUPP. S.C.R.

Schedule.

The learned Solicitor-General submitted thM these could only be taken into consideration in the subsequent year commencing on the 1st of April 1964 on the ground that on the 1st of April 1963 they only formed a part of the mass of undistributed profits, no portion of which had been earmarked or set apart for any p31rticular purpose. In our view, this is not the correct way of appreciation of the action of the directors.

It is well known that the accounts of the company have to be made up for a year up to a particular day. In this case tht day was the 31st March, 1963. If it was reasonably practicable to ma.ke up the accounts up to the 31st March 1963 and present the same to the directors of the respondent on April 1, 1963 they could have made up their minds on that day and declared their intention of appropriating the said and other sums to reserves of different kinds. But the fact that thev could not do so for the simple reason that the ca.lculation anct' collection of figures of all the items of income, expenditure of the company for the year ending March 31, 1963 was bound to take some time cannot make

anv difference to the nature or quality of the appropriation of the profits to reserves as determined by the directors after the first of April, 1963. Their determination to appropriate the sums mentioned to the three separate classes of reserves on the 8th August 1963 must be related to the 1st of April 1963 i.e. the hegitming of the accounts for the new year and must be treated as effective from that day.

A cae very similar to the one before us came up for consideration before the Bombay High Court in Commissioner of Tn

come-tax, Delhi v. Aryodya Ginning & Manufacturing Co. Ltd. (I)

In that case the profits of the company for the year ended 31st December 1948 were shown as Rs. 28,56,997-14-2. The directors made certain appropriations which included Rs. 11,08,000 to reserve fund and Rs. 1,50,000 to dividend reserve fund. The report of the directors was made on April 27, 1949 and a general meeting of the shareholders held on 27th June 1949 adopted the report and recommendation of the directors. The company was aessed to business profits tax chargeable under the Business Profits Ta.x Act for the accounting period 1st January to 31st March 1949 and the question which arose was : what was the capital of the company for the accounting period. The company contended that its paid-up capital should be increased by the amount of reserYes contituted by the recommendation made by the directors and accepted by the share-holders. The Commisioner of Income-tax went up to the High Court on a reference contending that as the re

serve wM not sanctioned till 27th June 1949 it could not be looked

(1) 31 I, T.R. 145.

c.I.T. v. MYSORE ELECT. LTD. (Mitter, J.)

at or considered as reserves on a day prior thereto. The learned Judges of the Bombay High Court were of the view that the resolution of 27th June, 1949 had a retrospective effect inasmuch as it referred to the profits of the year ending on 31st December,

194&, the appropriations to be made in the baAance-sheet as of that date and the reserves which should be constituted and shown in the balance sheet as on 31st December 1948. The High Court observed that when one looked at the_ balance sheet of the year ended 31st December 1948 the amounts mentioned were shown respectively in the reserve fi)nd and the dividend reserve fund and the shareholders by passing a resolution on 27th June, 1949 did not decide that these amounts should constitute reserves as from that date but they accepted the recommendation of the directors that these amounts should constitute reserves oo of 31st December. 1948.

The learned Solicitor-General referred to a judgment of the Madras High Court in Commissioner of Income-tax v. Vasantha

Mil!J Ltd. (1) where the Madras High Court dissented from the view expressed by the Bombay High COurt on the ground tha.t there could be no reserve until there was allocation in fact by a person having the requisite authority to order that allocation. In our view, although such allocation woo factually not possible on the very first day of a year but allocation on a later day should be treated as effective from that da.y in view of the fact that the division of undistributed profits became effective from that day.

In this view of the matter, we are of opinion that the High Court had come to the correct conclusion and the appeal should be dismissed. The appella.nt will pay the costs of the respondent.

K.B.N.

Ap; Jeal dismissed.

(1) 32 I.T.R. 237.

G. K. MITTER

P. JAGANMOHAN REDDY

I. D. DUA, JJ.

Surtax Act, 1964

Second Schedule

Second Schedule

Surtax Act, 1964

Second Schedule

Surtax Act, 1964

section 4

Third Schedule

s. 2(3)

s. 2(5)

Income-tax Act, 1961

First Schedule

s. 2(8)

Second Schedule

section 10

Indian Income-tax Act, 1922

section 34

Income-tax Act, 1961

IID Income-tax Act, 1922

Income-tax Act, 1961

Schedule VI to the Companies Act, 1956

s. 4

Second Schedule

Second Schedule


.826

STATE OF MYSORE & ANR.

vs.

PENDAKUR VIRUPANNA SETTY & SONS & ANR. ETC.

April 27, 1971 (J. M. SHELAT, A. N. GROVER AND I. D. DuA, JJ.J Andhra State Act (30 of 1953) and States Reorganisation Act, 1956- Parts of Madras State made part of Mysore State-Laws in Madras State made applicable to Bel/ary area and Madras Area-Mysore Adaptation of Laws Order 1956, and Mysore General Clauses Act, 1899-'Madras Area', whaJ is.

As a result of the Andbra State Act, 1953 a part of the Bellary district of Madras became part of the former State of Mysore, and as a result of the State Re-organisation Act, 1956 a psrt of the South Kanara district of Madras became part of the Mysore State. Under sections in those two Acts providing for the continuance of laws, s. II of tho Madras Commercial Crops Market Act, 1933, as it stood before its amendment in 1955 by the Madras Legislature, was in force in tho Bellary area of the Mysore State, and the . section as amended in 1955, was in force in the South Kanara area.

Section 11(1), before its omondmont in 1955, empowered a Market Committee to levy fees, but after amendment, the levy was a eess by way of sales tax in addition to tho sales tax levied under tho Madras General Salos Tax Act. Even though no notification, as required by the section, was issued by tho Government of Madras, tho South Kanara Market Committee was levying tho coss and continued to do so after the area became a part of Mysore. In order to validate the levy and to enable the Committee to continue the levy, tho Madras Commercial Crops (Mysore Amendment and Validation of Levy of Coss) Act was psssod by the Mysore Legislature in 1958. By the Mysore Amendment Act, a now section 11(1) was substituted for tho s. 11(1) as in force in the Madras area. This new sub-section also empowered tho levy of cess by way of sales tax, in addi lion to the sales tax under the general sales tax law.

The respondents were served a notice by the Secretary of the Bellary Market Committee to pay cess on groundnut seeds bought or sold in the notified area of the committee in the Bellary area of Mysore. As the respondents failed to comply with the demands, complaints were filed against them. The respondents filed petitions under Art. 226 of the Constitution challenging the validity of the levy and the High Court quashed the demand on the ground that what was being demanded was payment of sales-tax and since the maximum rate authorised by s. lS of the Central Sales Tax Act, 1956, read with s. 5(4) of the Mysore Sales Tax Act, 1957, had already been imposed, the Market Committee could not make a further levy.

In appeal to this Court,

HELD: (I) Section 11(1) as substituted by the Mysore Legishture in 1958, did not apply to the Bellary area and was confined only to th• 'Madras area', which meant, that part of the South Kanara district which became part of the Mysore State, because, H

(a) The statement of objects and reasons of the Mysore Amenrricnt shows that the changes in law and the validation provisions v,.ere co:i.fint:'d only to the levy of a cess by way of sales-tax by the South Kanara Market Committee.

(b) The Mysore Amendment was made applicable only to the 'Madras area' and this area could have reference only to the South Kanara area of the Mysore State, since: (i) By the Mysore Adaptation of Laws Order, 1956, read with s. 7(1) of the States Re-organisation Act, 'Madras area' under the Mysore General Clauses Act, 1899 (applicable to Mysore Act) means, the South Kanara area of the Mysore State; and (ii) it would be stretching language too far to include in the expression, 'Bellary area' what bad ceased to be a part of the Madras State in 1953, long before the Mysore Amendment in 1958.

(c) In s. 154 of the Mysore Agricultural Produce Marketing (Regulation) Act, 1966, it is stated that the Madras Commercial Crops Market Act as in force in the Bellary district, and the same Act as in force in the Madras area was being repealed, showing that the 'Bellary ara was not\ the same as the 'Madras area' of the Mysore State.

(d) The Mysore Amendment Act specifies the rates of only two commodities, namely, arecanut and coconut in the 'Madras area' and these two commodities figure as the principal commercial crops in the bye laws of the South Kanara Markel Committee, whereas they are not included as commercial crops in the bye laws of the Bellary Market Committee at all.

(532A-533D]

(2) If the Mysore Amendment Act, 1958, did not apply to the Bellary area, s. 11(1) of the Madras Commercial Crops Markets Act as it originally stood before its amendment in 1955 by the Madras Legislature was applicable. and under that provision only a fee and not tax could be levied.

Therefore, even though the demand in the present case employed the word

'<••ss', it referred only to a 'fee', and not to tax. [S33E]

{The matter was remitted to the High Court for determining tho validity and legality of the levy as 'fee' in relation to the services rendered.]

Civu. APPELLATE JURISDICTION : Civil Appeal Nos. 1827 to 1830 of 1968.

Appeals from the judgments and orders dated August 22, 23, 1967, and August 23, 1967 of the Mysore High Court in writ petitions Nos. 1967 of 1966, and 1968, 1969 and 2388 of 1966.

Shyam/ad Pappu, M. S. Ganesh and S. P. Nayar, for the appellants (in all the a.ppeals).

S. V. Gupte and A. V. Rangam, for respondent no. 1 (in all the appeals.)

The Judgment of the Court was delivered by

Grover, 1.-These ppeals by certificate arise from a judgement of the Mysore High Court delivered in certain petitions filed under Art. 226 of the Constitution challenging the demand of a cess levied in exercise of the powers conferred by s. ! l(J) of the Madras Commercial Crops Market Act 1933-hereinafter H called the 'Act'-the provisions of which were a.pplicable to the Bellary district of the State of Mysore.

SUPRBME COURT RBPORTS [1971] SUPP. s.c.R.

The respondents were served a notke by the Secretary of the Bellary Market Committee established under the Act to pay the cess on groundnut seeds bought or sold in the notified area of the Committee. As the respondents failed to comply with the demand complaints were filed against them for con travention of s. ll (!) of the Act and of certain rules and byelaws framed thereunder.

The respondents filed petitions under Art. 226 of the Constitution challenging the validity of the levy of cess.

The High Court quashed the demand on the ground that what was being really demanded was the payment of safos tax and since the maximum rate of sales tax authorised by s. 15 of the Centra~ Sales Tax Act 1956 read with s. 5(4) of the Mysore Sales Tax Act 1957 had already been imposed the Market Com mittee could not make any further or additional levy. A direc· tion was also made for refund of the cess collected during a period of three yea.rs preceding the date of the presentation of the writ petition.

For the purpose of determination of the point~ which have been raised it is necessary to set out the background and the history of legislation insofar as it is relevant concerning Ballary district. By the Andhra State Act 1953 (Centra•l Act 30 of 1953) a part A State to be known as "Andhra" came into eXistence.

By s. 4 of that Act there was added to the State of Mysore the territory which immediately before the appointed WM comprised in the Taluks of Bellary district other than Alur, Adoni and Rayadrug in the Sta.te of Mysore and the said territories thereupon ceased to form part of the State of Madras.

By virtue of s. 53 of the Central Act 30 of 1953 all laws which were in force immediately before the appointed day in the territories which became a. part of the State of Mysore were to continue to be in force until otherwise provided by the legislature of that State.

The Act became applicable to that area of the Bellary district which became a part of the Sta, te of Mysore.

Section ll (!) of the Act as it originally stood empowered the Market Committee to levy fees subject to such rules as might be made on the notified commercial crop or crops brought and sold in the notified area at such rates M it might determine. In certain decisions of the Madras High Court the view was expressed that the fee levied under s. ll (!) as it originally stood was not for services rendered h1t was really a mx levied for raising funds for constructing the market. With a view to avoid the legality of the levy being questioned the Madras legislature amended s. 11(1) by Madras Act 33 of 1955. It was sta, ted in the objects and reasons of the Bill, which was introduced in the legislative assembly of that State, that it was proposed to make it clear that the levy was a cess by way of sa.les tax and that it was in addition to the sales tax levied

MTSOJ.i v. P. v. SBITY (Grover,/.)

under the Madras General Sales Tax Act 1939 and was ali!O subject to the provisions of Article 286 of the Constitution.

The following sub-i; ection was substituted for sub-s. (J) of s. 11 of the Act:

"Notwithstanding anything contained in the Madras Genera.I Sales Tax Act, 1939 (Madras Act IX of 1939), the Market Committee shall subject to such rules as cay be made in this behalf, levy a cess by way of sales :ax

on any commercial crop bought and sold in the notified area a, t such rates as the State Government may, by noci

fication, determine.

Explanation .................. " Since that part of Bellary district which had bnen included in the Mysore State by virtue of the Central Act 30 of 1953 was no longer a part of the State of Madras the above amendment made in 1955 did not apply there.

The amended section, however, was applicable to South Kanara district which then formed part of the State of Madras. By the States Reorgamisatiorr Act 1956 the district of South Kanara. with the exception of the Taluk of Kollegal and certain other areas became part of the new State of Mysore. Section 7(a) of that Act conta.ined a provision similar to s. 53 of the Central Act 30 of 1953. The laws operating in the State of Madras became applicable to areas which were formerly in that State. Thus s. 11 of the Act, as amended, in the year 1955 by the legislature of the State of Madras continued to apply to the South Kanara district of the State of Mysore.

The situation on that date was tha.t in the district of Bellary which became part of the former State of Mysore s. 11 of the Act was in force 3'! it stood before its amendment in 1955 by the Madras legislature. But s. 11, a1< amended, was in force in the district of South Kanara.

In 1958 a Bill was introduced in the Mysore Legislature to amend the Act as in force in the Madras area. In the sta, tement of objects and reasons it was mentioned that s. 11 of the Act, as amended .by the Madras Legislature in 1955 a.nd as in force in South Kanara district, empowered the South Kanara Market Committee to levy a cess by way of sales ta.x on any commer cial crop bought and !!Old in the notified area at such rates as

the Government might determine.

No notification as contemplated by the section was issued by the Government of the erstwhile State of Madras and the Market Committee continued to levy a cess at the same rate as it was levying prior to the amend ment.

In the decision of the Madras High Court it had been held that the levy of cess was invalid as no. otificMion had ben is>ued by the State Government.

The validity of the collcet1on of the fee prior to the amendment Act ol 1955 had also been

34-1 S.C. lndia/71

530 SUI'RBMB COURT REPOllTS

(1971) SUPP. S.C.R..

A questioned. It was, therefore, necessary to validate the levy and collection of the cess already made and to amend the Act to enable the Committee to continue to levy the cess.

Previously an Ordinance had also been promulgated on account of the urgency of the matter. The Madras Commerdal Crops Market (Mysore Amendment and Validation of Levy of Cess) Act 1958 B received the assent of the Governor on November 30, 1958.

By s. 2 of this amending Act, s. 11 of the Act was amended. Subs. (!) as in force in the "Madras area" was substituted and was to be deemed to have been substituted with effect from November 23, 1955. This sub-section wa~ as follows:-

"(!) Notwithstanding anything contained in the C general sales tax law for the time being in force, the mairket committee shall levy a cess by way of sales tax on any commercial crop bought or sold in the notified area at th, e rates specified hereunder :-

!. Arecanut

2. Coconut."

Section 4 validated the fee or cess collected or paid before the commencement of the amending Act of 1958.

Section 120 of the States Reorganisation Act 1956 empowered the appropriate Government for the purpose of facilitating the application of any la.w in relation to any of the States formed or territorially altered to make, within the specified period, such adaptations and modifications of the law, whether by way. of repeal or amendment, 311 might be necessary or expedient and ievery such law was to have effect subject to the adaptation or .modification so made until altered, repealed or amended by the competent legislature or other competent authority.

By the Mysore Adaiptation of 'Laws Order 1956 "Madras area" was to mean the territory specified in clause (d) of sub-s. (I) of s. 7 of the States Reorganisation Act. According to that provision South Kanara district except Kasargod taluk and Amindivi islands and Kollegal Taluk in the State of Madras became a part of the State of Mysore. In other words according to the Adaptation of Laws Order the "Madras area" was to be confined to the above territories only. The Mysore General Clauses Act 1899, after the adaptations made, contained the definition of "Madras area" in clause 47 of s. 3 confining it to the territories specified in clause (d) of sub-s. (!) of s. 7 of the States Reorganisation Act 1956. This meant. that it did not include that part of Bellary district which had been incorporated in the State of Mysore by the Centrnl Act 30 of 1953.

Therefore under s. 3 of the Mysore General Clauses Act in any of the Mysore Acts made

MYSORE v. P. v. SEITY (Grover, J.) 531

after its commencement unless there was anything repugnant in A the subject or context "Madras area" was to mean the territory which was incorporaited in Mysore by the States Reorganisation Act 195'1 and which did not include the Bellary district with which we are concerned in the present appeals.

The Mysore Agricultural Produce Marketing (Regulation) 8 Act, 1966 (Mysore Act 27 of 1966) was published in the Mysore Gazette on September 15, 1966. S. 154 of that Act which relates to Repeal and Savings is as follows :-

"154. Repeal and savings.-(!) The Madras Commercial Crops Market Act, 1938 (Madras Act XX of

1933) as in force in Bellary District, the Madras Comc mercial Crops Market Act. 1933 (Madras Act XX of 1933), as in force in the Madras Area .................. are hereby repealed."

As the impugned proceedings relate to levy in the Bellary district of the State of Mysore for the year prior to the enactment of the new Act of I 966 one of the main questions for determination is whether the amendment made in s. 11(1) by the amending Act of 1958 passed by the Mysore legislature was applicable to thait area or whether the amending provision was confined only to the "Madras Area" which meant the district of

South Kanara with the exception of specified area which came to be incorporated ii\ the State of Mysore in 1956. The High Court was of the opinion that the definition contaiined in clause 47 of s. 3 of the Mysore General Clauses Act of "Madras Area" which was limited to the South Kanara district with the exception of specified areas had to be disregarded while interpreting the expression "Maidras Area" occurring in the Mysore Amending Act of

1958. It was held by the High Court that the "Madras Area" mentioned in the. Amending Act of 1958 m.ust also include that part of Bellary district which originally was a part of the State of

Madrae but which came to be incorporated in Mysore State as a result of the Central Act 30 of 1953. ·

It may be observed at this stage that the attention of the High Court does not appear to have been drawn to several matters including s. 154 of the Mysore Act 27 of 1966.

Indeed before us also these matters esc&ped the notice of the counsel until more information was obtained under our directions which necessitated a rehearing of the case. ·

We have no manner of doubt that the Bellary district which became a pad of the State of Mysore as a result of the Central Act 30 of 1953 was governed by s. 11 (!) of the Act as it stood at the time it had become applicable to that area by virtue

liUPRBMB COURT UPORTS (1971] SUPP. s.c.R.

of s. 53 of the aforesaid Central Act of 1953. The amendment made by the Mysore legislature in 1958 by which sub-s.(I) of s. 11 was substituted by a new section did not apply to the Bellary district and was confined only to the "Madras Area" which meant the district of South Kanara with the exception of specified areas.

We now proceed to give our rea•ons for coming to the above conclusion. (!) In the stakment of objects and reasons relating to the Madras Commercial Crops Markets (Mysore Amendment and Validation of Levy of Cess) Bill 1958 when it was introduced in the Mysore legislature there was mention only of the Act as amended by the Madras legislature in 1955 being in force in South Kanara district. The entire reading of the statement shows that whatever changes in law a, nd the validation provisions which were being made were confined only to the levy of a cess by way of sales tax by the South Kanara Market Committee. (2) The Amending Act of 1958 was made applica, ble only to what was called the "Madras Area". This area could haive reference only to the South Kanara district with the exception of the specified areas which was a, part of the State of Madras immediately before the States Reorganisation Act of 1956. It would be stretching the language too far to include in it the Bellary district which had ceased to be a part of the State of Madras much eairlier in 1953.

The adaptation made in the Mysore General Oauses Act 1899 by virtue of the provisions contained in the States Reorganisa-tion Act

1956 defined "Madras Area" to mean the territory specified in clause (d) of sub-s. (I) of s. 7 of thait Act. That would, as stated before, comprise only the territory of South Kanara district witlt

the exception of specified a, reas. The reasoning of the High Court that the definition given in the General Clause' Act should not be applied to the expression "Madras Area" in the Amending Act of 1958 can by no means be sustained. (3) The distinction between what may be called the "Bellary Area" a.nd the "Madras Area" which came to be incorporated in the State of Mysore in 1953 and 1956 respectively is fully substantiated by s. 154 of the Mysore Act 27 of 1966. It is stated there in unambiguous language that the Act as in force in the Bellary district and is in force in the "Madras Area" was being repealed.

If "Madras Area" also included the Bellary district as is the view of the High Court there was no question of s. 154 being worded as it is, making it quite clear, thait the Act as applicable in Bellary district, was not the same as in force in the "Madras Area". (4) The bye-laws of the Bellary Market Committee which were framed in exercise of the powers conferred by s. 19 of the Act read with the Madras Cornmercfal Crops Market Rules 1948 give an indication that the Amending Act of 1958 was not applicable to the Bellary district.

These bye-laws were approved in May 1%0.

Under bye-law 19 the Market Committee could levy fee or cess 9n the notified crops or commoditie11 at the rates specified in the

schedule. The schedule included cotton bales, loose cotton, kapas, groundnut seeds, groundnut pods and various other commodities.

The Amending Act of 1958 specified the rates of only two commodities Arecanut and Coconut. These are not to be found in the 5chedule of the bye-Jaws of the Bellary Market Committee.

In the bye-laws of the South Kanara Market Committee which came into force on July l, 1955 these two commodities, namely, Arecanut and Coconut are the principal, if not the only, commodi ties which figure. The suggestion which h~ been made at the bar and which does not seem to be without substa41ce is that in the South Kanara oistrict these are the only or the principal commodities which constitute commercial crops; whereas in the Bellary district there are other commodities mentioned in the bye-laws which do not include these two that constitute commercial crops.

Certain notifications have also been produced which show that rice, paddy etc. were declared to be commercial crops for the purpose of the Act even in the "Madras Area". But the bye-laws as also the Amending Act of 1958 seem to show that Arccanut and Coconut arc the m3!in or the principal commodities in the

"Madras Area" and these commodities, accordii\g to the byelaws. are confined to South Kanara district and are not included a6 commercial crops in the Bellary district at all.

Once it is held that the Mysore Amending Act of .1958 did not apply to the Bellary district only fee could levied under s.

11 (!) of the Act as it originally stood. Under bye-law 19 the rate specified for groundnut seeds was 9 paise per kilogram. The notice sent oy the Market Committee making the demand from the respondents employed the word "cess" but that cannot stand in the way of it being held that the demand related to a fee which alone could be levied under s. 11( I) of the Act. The finding of the High Court was that the cess demanded was a sales tax since it was levied under s. 11( 1) of the Act as amended by the Amending Act of 1958. It was observed that if it was not a tax the question that remained to be considered was whether the cess demanded was a fee and if so whether the levy of the fee was open to criticism that it was not cor-related to the services rcn dered.

As it has been determined by us that the demand by the Market 'Committee could be made lawfully only in respect of a fee the validity and legality of that levy will now have to be determined by the High Court. The distinction between a fee a.nd a tax is we! known and there are a series of decisions of this Court on what is a fee and wh": ' . the tests which distinguish it from a tax.

See Delhi Cloth & General Mills Co. Ltd. v. Chief

SUPl.BMJ COURT REPORTS (1971] SUPP. s.c.K.

Commissioner, Delhi, & Others('). The High Court will no doubt afford the parties &11 opportunity of filing supplementary affidavits and documents, if necessary, for determining whether the levy made is a fee. After deciding that matter the writ petitions will have to be disposed of in accordance with law by the High Court.

The appeals are allowed accordingly and the cases are remitted to the High Court for disposal. The parties will bear their own costs in this Court.

V.P.S.

Appeals allowed.

m-119701 2 S; c; 11.. 348.

826

STATE OF MYSORE & ANR

M. SHELAT

A. N. GROVER

I. D. DuA, JJ

Andhra State Act

States Reorganisation Act, 1956

Mysore General Clauses Act, 1899

State Re-organisation Act, 1956

Section 11(1)

Madras General Salos Tax Act

section 11(1)

s. 11(1)

Art. 226

Central Sales Tax Act, 1956

s. 5(4)

Mysore Sales Tax Act, 1957

Section 11(1)

s. 7(1)

Mysore General Clauses Act, 1899

s. 154

If the Mysore Amendment Act, 1958

s. 11(1)

Art. 226

Madras Commercial Crops Market Act 1933

Art. 226

s. 15

Sales Tax Act 1956

s. 5(4)

Mysore Sales Tax Act 1957

By the Andhra State Act 1953

s. 4

s. 53

s. 11(1)

Madras General Sales Tax Act 1939

Article 286

s. 11

Sales Tax Act, 1939

Madras Act IX of 1939

By the States Reorgamisatiorr Act 1956

Section 7(a)

s. 53

s. 11

s. 11

s. 11

s. 11

s. 2

s. 11

Section 4

Section 120

States Reorganisation Act 1956

s. 7

States Reorganisation Act

Mysore General Clauses Act 1899

clause 47

s. 3

s. 7

States Reorganisation Act 1956

s. 3

General Clauses Act

Mysore by the States Reorganisation Act

S. 154

Madras Act XX of

Madras Act XX of 1933

s. 11(1)

clause 47

s. 3

General Clauses Act

s. 154

s. 11

s. 53

s. 11

States Reorganisation Act

States Reorganisa-tion Act

s. 7

s. 154

s. 154

s. 19

bye-laws as also the Amending Act

s.

11

s. 11( I)

s. 11( 1)