DHANYALAKSHMI RICE MILLS ETC.

A v. ' THE COMMISSIONER OF CIVIL SUPPLIES AND Ai'\IOTHER

February 16, 1976 t

[A. N. RAY, C.J., M. H. BEG, R. S. SARKARIA AND P. N. SHINGHAL, JJ.]

Practice and Procedure-Representation by millers for permission to export rice-Pern1its granted on pay111ent of surcharge to tneet expenses of adnlinistra tive machinery set up to ensure export-Writ of n1andamus to refund n1oney collected-When n1ay be issued by this Court.

Indian Contract Act (9 of 1872), s. 72-Scope of.

The respondent-State Government was exercising po\vers delegated to it by the Central Government under the Essential Commodities Act, 1955. It introduced an 'Incentive Export Scheme' under which, millers, who delivered 50% of their purchases to the Food Corporation of India towards mill levy, would be eligible for exporting rice either within the State from one block to another or to States outside, on payment of, administrative charges. On the representation of the millers (appellants) that they could not sell rice locally because there was no demand, and that unless they were allowed to move rice outside the blocks or outside the State there \vould be deterioration of stocks resulting in loss to both trade and the consuming public, the State passed orders permitting the export of rice subject to the fulfilment of their commitments to the Food Corporation and the payment of administrative charges; and lso set up the necessary administrative machinery for ensuring such export.

Permits \\.'ere accordingly granted on tern1s and on condition of payment of the surcharge fixed. and the millers paid the surcharge and received the benefits under the permits. Thereafter, they claimed refund of the administrative surcharge on the ground that the State had no right to collect it and that they made the payments under mistake of law.

Where the State collected administrative charges but could not grant permits, the State refunded the money, but, where millers obtained permits and had taken advantage thereof, the State contended that there was no mistake on the part of the millers and that the payments were made voluntarily with full knowledge of facts and in discharge of their contractual obligations.

The millers filed writ petitions praying for directions to the State to refund the administrative surcharges collected from them, but the High Court held that they were not entitled to the relief on the grounds of delay. insufficiency of particulars regarding expenses and charges incurred by the Government, and the payments being voluntary.

Dismissing the appeals to this Court, HELD : The petitions were rightly dismissed by the High Court. Also, since various questions of fact are involved as to \Yhethef there was really a mistake, or whether it was a case of voluntary payment pursuant to contractual rights and obligations, the remedy under Art. 226 is not appropriate in the present cases. [396C-D]

(a) A mandamus will go where there is a specific legal right. If there G is no other means of obtaining justice, the writ of mandamus is granted to enable justice to be done.

A writ of mandamus for recovery of mohey could be issued only \Vhcn the petitioner was entitled to recover that mol'l.ey under some statute.

An order for payment of money may sometimes be made to enforce a statutory obligation. A mandaQ1us for refund of tax could be issued when the assessments were held to be illegal; but contractual obligations cannot be enforced through a writ of mandamus. Normally, the parties are relegated H to a sult to enforce civil liability arising out of a breach of contract or a tort, to pay an amount of money.

Mandamus may also be refused where there is an alternative remedy which is equally convenient, beneficial and effectual.

[395F-396C]

R. v. Bristol and Exeter Railway Co. 1845(3) Ry. & Can. Cas. 777; Lekh Rai v. Deputy Custodian, (1966] 1 S.C.R. 120; Har Shankar & Ors. v. Deputy Excise and Taxation Commisisoner & Ors., A.l.R. 1975 S.C. 1121; Sales Tax Officer Banaras & Ors. v. Kanhaiya Lal Mukundalal Saraf, (1959] S.C.R. !350; Suganmal v. State of Madhya Pradesh & Ors., A.I.R. 1965 S.C. 1740; Burmah Construction Co. v. State of Orissa, (1962] Supp. 1 S.C.R. 242 and State of Kera/a v. Aluminium Industries Ltd., 16 S.T.C. 689, referred to.

(b) The ground of delay on which the High Conrt, in the exercise of. its discretion, refused to grant a mandamus is not confined purely to the penod of limitation. Though some of the petitions were filed within 3 years from the date of payment, the delay is bound up with matters relating to the conduct of parties in regard to payments pursuant to agreements between the parties.

[395B-C]

(c) In the present cases, several petitioners have joined in the writ petitions.

Since each has an individual and independent cause of action, such a combina- C lion would be open to the objection of misjoinder even in a suit. [395C-D]

( d) The issues regarding limitation, estoppel and questions of fact in ascertaining the expenses incurred by the Government for administrative purposes of the scheme and allocating the expenses with regard to the quality as well as quantity of rice covered by the permits, are triable more appropriately in a suit. [395D]

(e) The plea of mistake is a bare averment in the writ petition. The payments did not disclose the circumstances under '"hich the alleged mistake occurred nor the circumstances in which the legal position became known to the millers. Whether there was a mistake in paying the amounts and when exactly the mistake occurred, are also issues triable in a suit. [396D-E]

(f) The Government did not support its demand for administrative charges either as a tax or a fee, but as a condition of the permit and as a term of agreement between the parties to meet the maintenance and supervision expenses for the Scheme of export permits.

Under s. 72, Contract Act, 1872, if one party, under a mistake of law, pays to another money which is not due by contract or otherwise, that money has to be repaid.

The mistake is material only so far as it leads to the payment being made v.ithout consideration. But if a mistake of law bad led to the formation of a contract. s. 21 of the Contract Act enacts that such a contract is not, for that reason. voidable; and if money is paid under that contract, it cannot be said that the money was paid under mistake of laVi'.

It 'vas paid because it was due under a valid contract, and if it had not been paid, payment could have been enforced.

[396E-397A]

 The State of Kerala etc. v. K. P. Govindan Tapioca Exporter etc. [1975] 2 S.C.R. 635; State of Madhya Pradesh v. Bhailal Bhai [1964] 6 S.C.R. 261 and Shiba Prasad Singh v. Srish Chandra Nandi, 76 I.A. 244, referred to.

(g) Where the High Court has. in the exercise of its discretion, refused to grant a writ of mandamus, this Court does not ordinari1y interfere. [394E]

Municipal Corporation of Greater Bombay v.

Advance Builders (India) Private Limited. rt9721 1 S.C.R. 408 at p. 420 and D. Cawasii & Co. v.

State of Mysore (1975] 2 S.C.R. 511 at p, 527, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeals No. 2390-2391 ( of 1972.

(From the Judgment and Order dated 27-3-1972 of the High Court of Andhra Pradesh in Writ Petition Nos. 3976-3977 of 1971.)

H Civil Appeal No. 604 of 1975

(From the Judgment and Order dated 28-3-1973 of the Andhra Pradesh High Court in Writ Petition No. 685/72).

Civil Appeals Nos. 2423-2437

(From the Judgment and Order dated 27-3-1972 of the Andhra Pradesh High Court in Writ Petitions Nos. 3974, 3975, 3978, 4015, 4016, 4017, 4018, 4019, 4020, 4021, 4247, 4246, 4248, 4249 and 5779/71).

Civil Appeal Nos. 2584-2586 of 1972 B

(From the Judgment and Order dated 28-3-1972 of the Andhra Pradesh High Court in Writ Petition No. 606 and 620, 622/72).

Civil Appeals Nos. 281-286 of 1973

(From the Judgment and Order dated 28-3-1972 of the Andhra Pradesh High Court in Writ Petitions Nos. 4642, 4643, 4644, 4701, 4702 and 5776 of 1971)

Civil Appeals No. 539-540 of 1973

(From the Judgment and Order dated 27.3.1972 of the High Court of Andhra Pradesh in Writ Petition Nos. 5170, 5173/71).

Civil Appeals No. 2019-2034 of 1973.

(From the Judgment and Order dated 28.3.1972 of the Andhra Pradesh High Court in Writ Petitions Nos. 4512, 4588, 4589, 4590, 4591, 4679, 4683, 4684, 4690, 4943, 4953, 4983, 5115, 5117 and 5118 of 1971)

Civil Appeal No. 653-662/74

(From the Judgment and Order dated 28.3.1972 of the High Court of Andhra Pradesh in Writ Petitions Nos. 603, 607, 609, 621, 627, 629, 738, 739, 744 and 746/72).

Civil Appeals Nos. 637, 1837-1842 of 1973.

(From the Judgment and Order dated 27.3.1972 of the Andhra F Pradesh High Court in Writ Petitions Nos. 343/72 and 5669/71, 254, 256, 260, 334, 562/72).

A. K. Sen, for the appellants in CAs 2390-2391 & 2423- -2437 /72.

P. A. Chowdhary, for the appellants in Cas 2019-2034/73.

N. Bhaskar Rao, for the appellants in CAs 2390-2391, 2423- 2437 /72.

B. Kanta Rao, for all the appellants.

A. K. Sen with S. Markandeya and N. Madhusudan Raj, for the appellants in CAs 604/75, 2584-2586/72 and 653-662/74.

A. K. Sen with N. Madhusudan Raj and G. N. Rao, for the appellants in CAs 281-286/73.

A P. Ram Reddv with P. P. Rao, for the respondents in CAs 2390- 2391 & 2423-2437/72, 281-282, 539, 540, 2019-2034/73; IT. 2-4 in CA No. 664/75, 653-662/74 and 2584-2586/72; rr. 1-3 in CA

1042/73 and for rr. in CA 636173, 1837-1841/73.

P. P. Rao for Respondent No. 1 in CA 604/75.

S. P. Nayar and Girish Chandra for respondent No. 1 in CAs B 653-662/74 & rr. in CAS 2584-2586/72.

The Judgment of the Court was delivered by

RAY, C.J.

These appeals arc by certificate from the common judgment dated 27 March, 1972 of the Andhra Pradesh High Court dismissing the writ petitions of the appellants.

The appellants filed the writ petitions for an appropriate writ or C order directing the respondent State of Andhra Pradesh to refund the sums of money collected from the appellants as administrative surcharges.

The appellants are dealers in foodgrains and held licences issued in accordance with the provisions of relevant statutes and control orders.

Under the provisions of the Essential Commodities Act, 1955 various Control Orders have been issued for maintaining or increasing supplies of any essential commodity or for securing their equitable distribution and availability at fair prices.

The Control Orders contemplate regulation or prohibition or production, supply and distribution of essential commodities and trade and commerce therein.

The State Government exercising powers delegated to it by the Central Government in accordance with the provisions of the Essential Commodities Act issued severnl measures to achieve the objectives of the Control Orders.

The Government of Andhra Pradesh introduced a scheme known as "Incentive Export Scheme".

Under that Scheme all millers who delivered 50 per cent of their purchases to the Food Corporation of India towards mill levy would be eligible for export under the Scheme. Incentive export permits were to be granted in the ratio of 2 : 3. The ratio meant that if a miller delivered two additional wagons to the Food Corporation of India he would be entitled to export three wagons on private trade account. The last date for delivering rice to the Food Corporation of India was fixed as 20 May, 1971. The last date for issue of permits was fixed as 31 May, 1971.

Permits were of four types. The A type of permits was for export from one block to another within the State. Under these permits admi.nistrative charge were Rs. 2.50 per quintal.

The B type of permits was for export from the State o.f Andhra Pradesh to other States in the South.

The administrative charges under the B type permits were Rs. 10/- per quintal.

The C type pe1mits was for export to any State outside Andhra Pradesh. The administrative charges for C type permits were Rs. 8 /- per quintal.

The fourth

I ) ,

type of permits was for export of broken rice under the A type or the C type permits and the surcharges were Re. 1.00 per qmntal.

By an Order dated 24 July, 1967 under section 5. of the Essential Commodities Act 1955 the Central Government directed that the powers conferred n it by section 3 ( 1) of the Essentil Commodities Act 1955 to make orders to provide for matters specified m clauses

(a)'. (b), (c), (d), (e), (f), (h),

(i) and

(j) of sub-section

(2) thereof shall, in relation to foodstufls be exercisable also by a State Government subject to the conditions ( 1) that such power shall be exercised by a State government subject to such d1recttons, if any, as may be issued by the Central Government in this behalf, and (2) that before making aay order relating to any matter specified in clauses (a) and ( c) or in regard to regulation of transport of any foodstuffs under clause

(d) of section 3 (2) of the Essential Commodities Act, the State Government shall also obtain prior concurrence of the Central Government.

By an Order dated 30 September, 1967 in exercise of powers cQl; Jferred by section 5 of the Essential Commodities Act the Central Government made an amendment to the order dated 24 July, 1967.

The amendment was to the effect that before making an order relating to any matter specified in clauses (a), (c) and (f) or in regard to distribution or disposal of foodstuffs to places outside the State or in regard to regulation of transport of any foodstuff uader clause ( d) the State Government shall obtain the prior concurrence of the . Central Government.

The State of Andhra Pradesh by an order dated 22 July, 1968 pursuant to the representation of the millers for export of rice outside the block but within the State passed orders that permits for export of rice would be issued subject to the fulfilment of their commitments and that administrative charge of Rs. 2.50 per quintal of rice would be collected from the millers before the issue of permits.

Under the Southern States (Regulation of Export of Rice) Order, 1964, Andhra Pradesh Rice and Paddy (Restriction on Movement) Order, 1965 and the Andhra Pmdesh Rice Procurement (Levy and Restriction on Sale) Order, l 967 every dealer or miller was required to supply a minimum quantity of rice to the State Government or its nominees and the balance, that is to say levy free rice, could be sold in the open market or exported to the places outside the block or State under permit issued by the State Government.

The reprcsentat; on of the millers for permission to exnort rice outs; dc the block or the State was that the denial of permission to export rice would result in deterioration of stocks and consequ~.1tial loss to both the trade and consuming public.

The appellants applied for and obtained permits by fulfilling two principal conditions. One was to satisfy the statutory requirements of supply to the Food Corporation of India and the other was payment of administrative surcharges for every quintal of rice.

In the petitions before the High Court the appellants alleged that they paid the surcharge under "trying circumstances", "mistaken belief and impression" that "the respondent has the right to collect the surcharge". The appellants alw alleged that having come to know about

the

1correct le~! .vosit!on in the matter they asked the respondents to refn'ild te _adm1; ll1Strallve surcharges. The respondents refnsed to refnnd any adm1mstrallve surcharge.

The appellants contended iu the petitions that the respondent Government has no right to collect any administrative surcharge, and, therefore the amount should be refunded. The appellants alleged that they made the payments m1der mistake of law.

The High Court held that the levy of administrative surcharge "is not backed by valid legislative sanction". The High Court said that the agreements between the State and the appellant millers for export were an executive scheme undertaken by the State but liability to pay tax must be covered by the statute. The High Court expressed the view that there could be no estoppel when both parties are under a mistake of law.

The High Court however held that the appellants were not entitled to any relief on three grounds. First, th~ administrative surcharges were paid voluntarily by t11e appellants. The appellants themselves represented for issue of permits. The appellants obtained the permits.

They exported rice under the permits. The High Court, therefore, held that the appellants cannot claim refund of the entire amount without giving due credit for the expenses or charges incurred by the Government for the issue of permits and for the supervision of export, transport and other administrative charges. The second reason given by the High Court was that the Court would not be justified in exercising discretion in favour of the appellants who voluntarily paid the administrative charges, obtained the permits and derived considerable profits therefrom. The third reason given by the High Court was that there was undue delay in claiming the refund.

Th.3 appellants contended that the three grounds on which the High Court dismissed the writ petitions were unsustainable. It is said on behalf of one of the appellants (Civil Appeals No. 2584 to 2586 of 1972) that in their application dated 10 February, 1970 for refund of charges paid by them the appellants gave particulars of payments showing the dates of payment, quantity covered by the permit, the amount of charges paid, the number of permit against which payment was made as well as the challan under which the payment was made.

Thereafter the appellants called upon the Collector to furnish copies of regulations under which surcharge was collected. The Collector by letter dated 28 July 1970 informed the appellants that the State Government alone was competent tO! give the copy of the relevant rule or regulation under which surcharge was collected.

The appellants referred to the letters dated 22 December, 1970 and 2 January, 1971 by which the State Government refused to grant certified copy of the rule or regulation on the ground that it was part of the official correspondence not meant to be supplied to the private party. In this background the appellants contended that since 10 February, 1970 when the appellants demanded refund the appellants from time to time made application for refund and the last reminder was on 30 December, 1971. Some of the appellants filed their writ petitions in the

I ,

High Court in the month of September, 1970 and some of them filed A their writ petitions in the month of January 1972. It was, therefore, said that the applications for refund were all made within three years from the date of paymentand the High Court should not have dismisse<.l the writ petitions on the ground of delay.

The appellants next contended that the pleadings were not vague and the appellants in Civil Appeals No. 2584 to 2586 of 1972 gave B all details of the payments and, therefore, the High Court should not have dismissed the writ petitions on the ground of vagueness of particulars and pleadings.

It was also said on behalf of the appellants that if the levy as well as collection of administrative surcharges was without authority of law the High Court was in error in refusing any relief to the appellants on the ground that the payments were voluntarily made.

The appellants relied on the decision of this Court in The State of Kerala etc. v. K. P. Govindan Tapioca Exporter etc.(') as an authority for the proposition t!iat the levy of administrative surcharge is illegal. In the Tapioca case (supra) under the. Kerala Tapioca Manufacture and Export (Control) Order, 1966 no person could export tapioca except in accordance with permit. The State Government levied administrative surcharge under a scheme. The State contended that the administrative surcharge was in effect and substance a licence fee charged in exercise of the police powers of the State for permitting the appellants by grant of permits to export tapioca. This Court held that the scheme was not an order under any of the provisions of the Essential Commodities Act and no licence fee or fee for grant of permit was imposed by the Kerala Tapioca Control Order. The Kerala Tapioca Control Order only provided for levy of administrative surcharge. The Kerala Tapioca Control Order came into existence on 9 June, 1966.

Even before the promulgation of the Order administrative surcharge was levied under a scheme formulated by the State Government on 15 April, 1966 published in the Kerala Gazette on 3 May, 1966. The rate of administrative surcharge levied on tapioca under the scheme dated 15 April, 1966 varied from time to time.

This Court found that the order dated 15 April, 1966 formulating the scheme was not an order under any of the provisions of section 3 of the Essential Commodities Act.

The Scheme did not impose any licence fee.

The scheme merely provided for levying of administrative surcharge.

The orders levying administrative surcharge which followed the Tapioca Control Order did not refer to the exercise of any power under the Order.

Therefore, this Court held that the administrative surcharge in the Tapioca case (supra) was bad and the realisations were without any authority of law.

The appellants contended relying on the decision of this Court in State of Madhya Pradesh v. Bhailal Bhai( 2) that the High Court in exercise of powers under Article 226 has power to order refund and repayment of tax illegally collected.

The appellants submitted that the State had no power under any statute or any authority to

(1) [~97$) 2 S.C.R. 635.

A impose and collect administrative surcharge and, therefore, the payments which were made by the appellants were made under mistake of law and the State was liable to refund them.

The appellants contended that the administrative surcharge was neither in the nature of a fee nor was it a tax and there was no authority of law to support the levy and collection of administrative surcharge. It was said on behalf of the appellants that neither the Essential Commodities Act, 1955 nor the Southern States (Regulation of Export of Rice) Order, 1964 nor the Andhra Pradesh Rice and Paddy Order, 1965 nor the Andhra Pradesh Rice Procurement (Levy and Restriction on Sale) Order, 1967 conferred any power to levy administrative surcharge.

The respondents contended that the permits were granted pursuant to the representation of the appellants that unless they were allowed the movement of rice to places outside their blocks or outside the State they could not sell rice locally because there was no demand.

The respondents further said that for ensuring export of rice the administrative machinery had to be set up.

The permits were granted on terms and conditions of payment of surcharge and the appellants voluntarily paid sur, harge and received benefits unJcr permits.

The respondents also said that the permits were contractual obligations between the appellants and the respondents.

The High Court in exercise of its discretion refused to grant a mandamus on a consideration of facts and circumstances of the case.

The two principal matters which weighed with the High Court are these.

First, the appellants voluntarily paid the amounts and derived full advantage and benefit by utilizing the permits.

Second, there is undue delay in claiming refund.

Where the High Court has in exercise of discretion refused to grant a writ of mandamus, this Court does not ordinarily interfere. (See Municipal Corporation of Greater Bombay v. Advance Builders (India) Private Limited;(!) D. Cawasji & Co. v. State of Mysore.(')

Refund of illegal taxes stands on a different footing from claiming refund of surcharge paid under terms and conditions of permits. The only basis of tax is legislative sanction and if the legislative sanction fails, the collection of tax cannot be sustained. In the present case the claim for refund is to be judged between the rival contentions.

The appellants contend that there is no legislative sanction for collection of administrative surcharge.

The respondents on the other hand support the collection of administrative surcharge first as a condition for permit and second as an item of maintenance charges in the main

tenance and supervision of the scheme for export of rice.

The respondents also contend that the appellants have no right to claim refund under section 72 of the Indian Contract Act because the payments were neither under mistake of law nor under coercion.

It is said by the respondents that there is no coercion because the export scheme was voluntary.

Again, it is said that there is no mistake because the payments made were in fact due as part of the export scheme initiated at the instance of the appellants.

The respondents deny the claim of the appellants on the further ground that the

(I) [1972] I S.C.R. 408 at p. 420.

I p

appellants having derived the benefit and caused detriment to the Govermuent are estopped from questioning the validity of the payments voluntarily made. Another ground on which the respondents challenge the claim of the appellants is that the .Payments were part of the consideration of the agreement entered into by the appellants with State. If it be assumed that the agreements are illegal, the respondent contends that the appellant being a party to the same cannot sue for recovery of money paid.

All the matters were covered by the common judgment.

In so!lle cases the claims were beyond three years from the date of the payments.

In some cases they were within a lesser time but the ground of delay on which the High Court exercised discretion is not confined purely to period of limitation but is bound up with matters relating to conduct of parties in regard to payments pursuant to agreements

between the parties.

The remedy under Article 226 is not appropriate in the present cases for these reasons as well.

First, several petitioners have joined.

Each petitioner has individual and independent cause of action.

A suit by such a combination of plaintiffs would be open to misjoinder.

Second, there are triable issues like limitation, estoppel and questions of fact in ascertaining the expenses incurred by the Government for administrative surcharges of the scheme and allocating the expenses with regard to quality as well as quantity of rice covered by the permits.

The appellants contended that in all cases of claim for refund of money, the payments were voluntary and, therefore, the High Court was in error in refusing refund because of ti]e voluntary character of payment.

In cases relating to refund of payments of tax which is illegal the voluntary character of payment is that tax payer has no say but is compelled to pay.

In the present cases the questions arc whether it can be said that payments of administrative charges were voluntary in order to reap benefits of export of rice covered by the permits.

The contention of the respondents that the export scheme was framed at the instance of the appellants and that the administrative surcharge is the consideration for preparation, maintenance and supervision of the scheme raises questions which can be solved by a suit.

A mandamus will go where there is a specific legal right.

Mandamus may be refused where there is an alternative remedy which is equally convenient, beneficial and effectual. If there is no other means of obtaining justice, the writ of mandamus is oranted to enable justice to be done. . Those are cases where justic.;' cannot be done ?nl.ess a mandmus is to go.

R. V. Bristol and Exeter Rqtlway Co. ( ) is an authority for the proposition where the Corporation could b.e compelled to pay a sum of money pursuant to an agreement which could not be enforced by action because the agreemet w; s not under seal.

This Court in Lekh Raj v. Deputy Custodian( ). and Har Shnkar & Ors. v. Deputy Excise and Taxation Comm1ss1oner & Ors.,( ) held that contractual obligations cannot be enforced through a wnt of mandamus.

(1) 1845 (3) Ry.& Can. Cas. 777.

(2) [1966] I S.C.R.120,

(3) A.I.R. 1975 S.C. 1121.

The view of this Court in Sales Tax Officer, Banaras & Ors. v.

Kanhaiya Lal Mukundalal Saraf(') was that a mandamus could be issued when the assessments were found to be illegal.

In Suganmal

v. State of Madhya Pradesh & Ors. (2) this Court said that the mandamus for recovery ofmoney could be issued only when the petitioner was entitled to recover that money under some statute.

In Burmah Construction Co. v. State of Orissa( 3) this Court said that normally the parties are relegated to a suit to enforce civil liability arising out of a breach of contract or a tort to pay an amount of money.

An order for payment of money may sometimes be made to enforce a statutory obligation.

In the State of Kera/a v. Aluminium lndustries Ltd. (4) the refund claimed was by reason of the moneys being paid under mistake of law and the collection having been made wrongly.

The petitions solely for the writ of mandamus directing the State to refund the moneys in the present case have been rightly refused by the High Court on the grounds of delay, insufficiency of particulars and pleadings, and voluntary payments.

The additional reasons in our opinion are that various questions of fact arise as to whether there was really mistake or it was a case of voluntary payment pursuant to contractual rights and obligations.

The plea of mistake is a bare averment in the writ petitions. The payments did not disclose the circumstances under which the alleged mistake occurred and the circumstances in which the legal position became known to the appellants.

The respondents contradicted the plea of mistake.

A triable issue arose as to whether there was a mistake in paying the amounts and when exactly the mistake occurred and under what circumstances.

Section 72 of the Contract Act states that a person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it.

The mistake is material only so far as it leads to the payment being made without consideration. This Court has said that the true principle is that if one party under a mistake of law pays to another money which is not due by contract or otherwise that is to be repaid.

When there is a clear and unambiguous position of law which entitles a party to the relief claimed by him equitable considerations are not imported.

A contract entered into under a mistake of law of both parties falls under section 21 of the Contract Act and not section 72. If a mistake of law had led to the formation of a contract, section 21 enacts that the contract is not for that reason voidable.

If money is paid under that contract, it cannot be said that the money was paid under mistake of law; it was paid because it was dne under a valid contract, and if it had not been paid payment could have been enforced. (See Shiba Prasad Singh v.

Srish Chandra Nandi( 5 ) See also Pollock & Mulla--Contract Act 9th Ed. by J. L. Kapur pp. 519-520). In the present case, the respondents do not support the demand for administrative charges either as a tax or as a fee but as a term and condition of permit and as a

(1) [1959] S.C.R. 1350.

(3) [19621Supp.1 S.C.R. 242.

(5) 76 I.A. 244.

(2) A.LR. 1965 S.C. 1740.

(4) 16 S.T.C. 689.

DHANYALAKSHMI RICE Mil-LS V. C.C.S. (Ray, C.J.) 397

term of agreement between the parties for the maintenance and supervision expenses for the scheme for export permits of rice from one block to another within the State or outside the State.

It may be stated here that in cases where the State collected administrative charges but could not grant permits the State refunded moneys to such person.

It is only where millers have obtained permits and taken advantage thereof that the State contends that there is no mistake and that the payments were made voluntarily with full knowledge of facts.

For these reasons the appeals are dismissed. If the parties are so advised they may institute suits and all rival contentions would be open to both parties. Parties will pay and bear their own costs.

V.P.S.

Appeals dismissed .

11-1522SCI/76

DHANYALAKSHMI RICE MILLS ETC

THE COMMISSIONER OF CIVIL SUPPLIES AND ANOTHER

February 16, 1976

A. N. RAY, C.J.

M. H. BEG

R. S. SARKARIA

Indian Contract Act

s. 72

Food Corporation of India

Art. 226

(1966] 1 S.C.R. 120

s. 72

Contract Act, 1872

s. 21

[1975] 2 S.C.R. 635

[1964] 6 S.C.R. 261

(1975] 2 S.C.R. 511

A. K. Sen

P. A. Chowdhary

N. Bhaskar Rao

B. Kanta Rao

S. Markandeya

N. Madhusudan Raj

G. N. Rao

A P. Ram Reddv

P. P. Rao

S. P. Nayar

Girish Chandra

RAY

Essential Commodities Act

Government of Andhra Pradesh

20 May, 1971

31 May, 1971

Andhra Pradesh

section 5

Essential Commodities Act 1955

section 3

Essentil Commodities Act 1955

section 3

Essential Commodities Act

30 September, 1967

section 5

Essential Commodities Act

State of Andhra Pradesh

22 July, 1968

10 February, 1970

28 July 1970

22 December, 1970

2 January, 1971

30 December, 1971

Essential Commodities Act

9 June, 1966

15 April, 1966

3 May, 1966

section 3

Essential Commodities Act

Article 226

section 72

Indian Contract Act

Article 226

Section 72

section 21

section 72

section 21

J. L. Kapur


COMMISSIONER OF INCOME TAX BIHAR, PATNA

SAHU JAIN LIMITED

February 16, 1976

[P. K. GOSWAMI AND S. MURTAZA FAZAL ALI, JJ.)

lncon1e Tax Act, 1922-Section 23A(l)-Undistributed profits of a company -Company in which public are substantially interested-Acting in co1Icert- Rclatio11ship aniongst shareholders if decisive-Family concern.

Sahu Jain was a private limited company during the assessment years 1952-53 and 1953-54.

All the shareholders of the company are the family members of ~Ir. S. P. Jain except two employees who held 20 out of 50,000 shares and excepting the three Companies ,.vhich were also sister concerns.

Under s. 23A of the lncome Tax Act. 1922, prior to its amendment in the year 1955, where the Income Tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any Company are less than 60 per cent of the assessable income of the company as reduced by the Income Tax and Super 1ax payable by the company in respect thereof, he shall unless he is satisfied that having regard to the loss incurred by the company in earlier years or to the smallness of the profit made,. the payment of a dividend or a larger dividend than declared would be un 4 reasonable, make an order in writing that the undistributed portion of the income of the company of that previous year as compllted for incon1e tax purposes and reduced by the amo.unt of income tax and supertax payable by the company in respect thereof shall be deemed to have been distributed as dividends amongst the shareholders.

The proviso to the said section provides that the provisions of the section \VOuld not apply to any company in which the public are substantially interested if shares of the company carrying not less than 25 per cent of the voting power have been allotted unconditionally to or acquired unconditionally by the public or beneficially held by public. The Income Tax Officer held that the provisions of s. 23A were attracted in the case of the company for both the years.

The Appellate Assistant Commissioner confirmed the order of the Income Tax Officer. The Tribunal held that s. 23A \Vas not applicable to the co1npany in respect of both the assessment years.

The Tribunal held that unless it is presumed that because of relationship Shri S. P. Jain, Smt. Rama Jain and Shri A. K. Jain should be regarded as acting in concert there is no other material on record on the basis of which sucha conclusion could be supported.

On a reference made by the Tribunal, the High Court answered the question in favour of the assessee and against the Revenue.

In an appeal by special leave the appellant contended :

1. 80 per cent of the share capital was held by S. P. Jain and his wife and t\vo sons; one of whom \vas a minor throughout the period and another for a portion of the period and that the remaining shares were held by the company which \Vere under the control of S. P. Jain and that only 20 sh3resout of 50,000 shares were held by two employees under the control of S. P. Jain.

2. A. K. Jain was appointed as a Director when he \Vas a minor and he became a Managing Director on a salary of Rs. 6,000/ per month when he \Vas 20 years old.

3. S. P. Jain who was a Director resigned making room for his Private Secretary for appointment as Director.

4. The Company showed a loss of Rs. 2 lacs and odd in a transaction iR H hessian and the same was shown as profit by Smt. Rama Jain wife of S. P.

Jain.

5. S. P. Jain, A. K. Jain. R. Sharma and N. C. Jain were the promoters pf the company and were signatories to the Memorandum of Association.

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C.l.T. V. SAHU JAIN LTD. 399

The respondent contended :

1. Smt. Rama Jain and A. K. Jain were independent assessees.

A .. _. ~· Jan was taking independent decisions as a competent Director. Mere re1ationsh1p would not lead to the conclusion that the said two shareholders acted in concert with S. P. Jain.

2. A. K. Jain was an independent shareholder and was not under the control of S. P. Jain or any other Director or shareholder.

3. N. C. Jain was Director from 1950 to 1954 and S. P. Jain became B Managing Director subject to the approval of the Government. A. K. Jain was appointed as Deputy Managing Director on a remuneration of Rs. 6,0001per month subject to the approval of the Central Government.

4. The transactions like one of hessian are common transactions and no undue importance can be attached to it.

5. Merely because .some persons are promoters or employees of a Company that would not affect their character as shareholders of the Company.

C Allowing the appeals by special leave, HELD : 1. The controversy is whether the company is one in which the public has 25 per cent or more shares. [404C]

2. This Court held in the case of Commissioner of Income Tax. We.st Bengal

v. East Coast Commercial Co. Ltd .• [1967] (I) SCR 321 that the word 'public" is used in the explanation to s. 23A in contra-distinction to one or more persons who act in unison and amongst whom the voting power constitutes a block. This Court also held that the Tribunal had to decide in the first instance whether there \vas a group of persons acting in concert holding a sufficient number of shares which may control the voting as a block. But the existence of block is not decisive. The company would still be a company in which public are substantially interested if 25 per cent or more of the voting power has been allotted unconditionally to and beneficially held by the public. This Court also held that the relationship and position as Director are not by themselves decisive. But if the relatives act not freely but with others they cannot be said to belong to the public. The test is not whether they have actually acted in concert but whether the circumstances are such that human experience tells us that it can safely be taken that they must be acting together.

[406A, C-D, H, 407A]

3. It is clear that this company was a family concern with only 20 shares out of 50.000 shares allotted to the two outsiders who again happened to be paid employees. The presence of these two outsiders is of the least significance in the matter of management of the affairs of the company.

A. K. Jain hecame a Director even when he was a minor.

He would not ordinarily be able to play the role he is supposed to have doite in the Board meetings unless S. P. Jain was confident that the Board was carrying out its mandates with regard to the affairs of the Company. The fact that A. K. Jain and others' were authorised to sign agreements on behalf of the Company is not of 2re<lt si_gnificance. There is no evidence whatsoever to show that Rama Jain wife of S. P. Jain was at all independently acting.

[409G, H, 410]

4. When a company is composed mostly of family members owning lion'i!: share in the entire share capital of the company the onus to keep clear of the reach of s. 23A will be on the shareholders _by adducing some positive evidence about the absence of control by the contro1ling shareholders. [410-BJ

5. No single factor can be decisive but having regard to the totality of the circumstances revealed in the case and the conduct of the transactions of the company taken with the relationship which in the circumstances of this case is not a ne2liclble element, this Court is clearly of the opinion that it is a case in which it cannot be said that the public is substantially intereste..d in 25 per cent or more shares of the company. [410D-E]

6. Even if A. K. Jain is said to be a member of the public, his share~ together with the shares of Ashoka Agencies Limited is 500 less than the minimum shareholdin.e: requisite to earn the benefit of the third proviso to s. 23A read with the explanation. [410-EJ

7. Between August 11, 1951 and May 1, 1952, A. K. Jain and 2 employee Directors apparently took all decisions for the company in the Board's meetings.

This is not ordinarily possible but for collaboration with the major shareholders.

This is a case where more ls meant than meets the eye.

[ 41 OE~F]

8. It is a clear case of all the shareholders acting in concert and in unison and the two employee Directors were merely dummies.

There is not the slightest inkling of the public being interested far less substantially interested in this company. [410G]

9. The intimate relationship of the shareholders, with not the least evidence of disconcert amongst them, the ordinary expectation for individual profit in commercial undertaking; the history of the company and its continued smooth working is inconsistent with anything but full unison amongst the shareholders.

The Board's meetings are evidence of well organised, well knit, close unity of views in all affairs which in ordinary course of human conduct would not have been at all possible but for a single or concerted action in the company management by a controlling group.

[410D-F]

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 761 & 762. of 1971.

(Appeals by Special Leave from the Judgment aud Order dated the 14-3-1969 of the Patna High Court in M.J .C. Nos. 182 and -~ 183 of 1962).

B. Sen, T. A. Ramachandran and S. P. Nayar, for the appellant.

Hardayal Hardy, and Bishamber Lal, for respondent.

The Judgment of the Court was delivered by

GOSWAMI, J.

These two appeals by special leave are directed against the common judgment of March 14, 1969, of the Patna High Court in the matter of two references under section 66 (1) of the Indian Income-tax Act, 1922, relating to assessment years 1953-54 and 1954-55 of the respondent (hereinafter to be referred to as the company).

The case has a rather chequered history as will appear from the facts narrated below :- The company at the material time was a private limited company and at the end of the relevant previous years, namely, August 31, 1952 and August 31, 1953, the shareholding was as follows:-

Number of shares on 31-8-1952 31-8-1953.

1. Sri Ashok Kumar~Jain, 10,000 10,000 Managing Director.

2. Sri R. Sharma, Director. lO 10

3. Sri N. C. Jain, Director. 10 10

4. Sri S. P. Jain 10,000 10,000

5. Smt. Rama Jain . 10,000 10,000

6. Sri Alok Prakash Jain l 10,000 10,000

7. Sri Rishabh Investment Ltd. 5,000 5,000

8. Dal mi a Jain Co. Ltd. 2,000 2,000

9. Universal Bank; or India Ltd. 980 980

10. Ashoka Agencies Ltd. , 2,000 2,000

50,000 50,000

Of these shareholders Rama Jain is the wife of S. P. Jain and Alok Prakash Jain and Ashok Komar Jain are the sons of S. P. Jain and Rama Jain.

Ashok Kumar Jain (briefly A. K. Jain), the Managing Director, attained majority on March 5, 1952, while Alok Prakash Jain was a minor during both the accounting years.

The three companies, namely, Rishabh Investment Ltd., Dalmia Jain Co. Ltd. and Universal Bank of India Ltd., are companies to which the provisions of action 23A of the Income-tax Act, 1922 .(briefly the Act) prior to its amendment by the Finance Act 1955, applied.

S. P. Jain was the principal shareholder of the Universal Bank of India Ltd. holding 980 shares.

Ashoka Agencies Ltd. with 2000 shares was a company to which admittedly section 23A did not apply.

R. Sharma and N. C. Jain holding 10 shares each were employees, N. C. Jain being the Secretary of S. P. Jain.

The Income-tax Officer by his orders of September 25, 1957 and October 30, 1957, held that section 23A was attracted in the case of the company for both the years.

On appeal, the Appellate Assistant Commissioner remanded the matter back to the Income-tax Officer for a finding on certain additional facts.

The Income-tax Officer in his remand report submitted certain additional facts to the Appellate Assistant Commissioner who in due course affirmed the orders of the Income-tax Officer.

The company appealed to the Income-tax Appellate Tribunal, Bihar, at Patna.

The Tribunal allowed the appeal by its order of January 26, 1961 (7) and held that section 23A was not applicable to the company in respect of both the assessment years.

At the instance of the Commissioner Income-tax, Bihar, the following question was referred by the Tribunal to the High Court :

"Whether on the facts and circumstances of the case the Tribunal was justified in holding that the provisions of section 23A of the Income-tax Act were not applicable to the assessee company for the assessment years 1953-54 and 1954-55" ?

The High Court by its order of December 9, 1965, in view of two decisions of this Court, namely, Raghuvanshi Mills Ltd. v. Commissioner of Income-tax, Bombay,(') decided on December 7, 1960 and Commissioner of Income-tax Bombay v. Jubilee Mills Ltd.(2) Bombay, decided on September 1, 1962, directed the Tribunal to submit a supplementary statement of case to it :

"Whether bearing in mind the principles laid down by the Supreme Court in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax (41 Income Tax Reports 613) and Commissioner of Income-tax, Bombay City v. Jubilee Mills Ltd. ( 48 Income Tax Reports 9) Shrimati Rama Jain and Sri Ashok Kumar J an, or either of them could be safely taken to have acted m concert with Sri S. P. Jain during the years in question, in respect of the affairs of the assessee company" ?

(I) [1961] 2 S.C.R. 978.

(2) [1963] Supp. 1 S.C.R. 83.

The High Court also directed that "the Tribunal may take additional evidence, if it considers it necessary to enable it to state the supplementary case as directed above".

The Tribunal thereafter, after hearing the parties, submitted a supplementary statement of case to the High Court on September 30,

1966. A controversy arose before the Tribunal with regard to entertainment of additional evidence which the Revenue wanted to adduce before it, particularly in view of the direction of the High Court, but the Tribunal did not accede to the request and additional evidence was not received.

The matter then came up before the High Court resulting in the impugned order against the Revenue.

Hence these two appeals by special leave.

The Revenue reiterated its grievance before the High Court about the Tribunal's refusal to entertain additional evidence without success and the matter is no longer in controversy in view of a decision of seven Judges of this Court in The Keshav Mills Co.

Ltd. v.

Commissioner of Income-tax, Bombay North,(') affirming the earlier decisions of this Court in the case of the New Jehangir Vakil Mills Ltd. v. The Commissioner of Income-tax, Bombay North(') and The Petlad Turkey Red Dye Works Co. Ltd. Petlad v. The Commissioner of Income-tax, Bombay, Ahmedabad('). It is now well-settled that when the Tribunal has disposed of the matter and is preparing a statement of the case either under Section 66(1) or under section 66(2), there is no scope for any further or additional evidence and the power of the High Court under section 66 ( c) can be exercised only in respect of material and evidence which has already been brought on the record.

It was contended on behalf of the Revenue before the High Court that the finding of the Tribunal was perverse.

Mr. Sen appearing on behalf of the Revenue before us has fairly and, in our opinion, rightly not pressed this submission before us.

Similarly on behalf , of the company also it was contended before the High Court that there was no principle of law involved in drawing any inference in the cases in answer to the plea of the Revenue that the finding whether section 23A was not attracted was a mixed question of law and fact. It is not possible to hold that the question referred to the High Court is not a question of law as undoubtedly on the statement of case an important question of law does arise and the composite reference was competent.

The question that arises for consideration is whether on the facts and circumstances that are established before the Tribunal the company in the two assessment years can escape the reach of section 23A of the Act.

(2) [1960] l S.C.R. 249.

(3) [1963] Supp. 1 S.C.R. 871.

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Section 23A prior to its amendment in 1956 and so far as it is A material read as follows :-

"23A ( 1). Power to assess individual members of certain companies.- Where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company up to the end of the sixth month B after its accounts for that previous year are laid before the company in general meeting are less than sixty per cent, of the assessable income of the company of that previous year, as reduced by the amount of income-tax and super-tax payable by the company in respect thereof he shall, unless he is satisfied that having regard to losses incurred by the .company in earlier years or to the smallness of the profit C made, the payment of a dividend or a larger dividend than that declared would be unreasonable, make with the previous approval of the Inspecting Assistant Commissioner an order in writing that the undistributed portion of the assessable income of the company of that previous year as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable by the com- D pany in respect thereof shall be deemed to have been distributed as dividends amongst the share-holders as at the date of the general meeting aforesaid, and thereupon the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of assessing his total income :

• • • Provided further that this sub-section shall not apply to any company in which the public are substantially interested ..... .

Explanation.-For the purpose of this sub-section, a company shall be deemed to be a company in which the public are substantially interested if shares of the company . . . . carrying not less than twenty-five per cent of the voting power have been allotted unconditionally to or acquired unconditionally by, and are at the end of' the previous year beneficially held by the public . . . . . and if any such shares have in the course of such previous year ?een the subject of dealings in any stock exchange or are m fact freely transferable by the holders to other members of the public".

In this case the company did not declare any dividend for the assessment year 1953-54.

In the next assessment year 1954-55,

~:mly. a sum of Rs. 50,000/- was distributed as dividend. It is not m dispute hat the company had sufficient requisite assessable income out of .which ufficient or larger dividend could have been paid.

There is no dispute that the payment of an adequate dividend for the first year and larger dividend for the next year would have been

at all unreasonable in respect of these two assessment years.

The only controversy between the parties is with regard to the exclusion of the company from the application of section 33A in view of the third proviso read with the Explanation.

In other words, is the company one in which the public are substantially interested ? It could be so in terms of the Explanation if 25 per cent shares of the company or more had been allotted unconditionally to, or acquired unconditionally by, and are at the end of the previous year beneficially held by the public and if any such shares in the course of such previous year were in fact freely transferable by the holders lo other members of the public. It was not in dispute that the shares of the company were in fact freely transferable by the holders to other members of the public. The controversy, therefore, is within a very narrow compass, namely, whether, as stated earlier, the company is one in which the public has 25 per cent or more shares allotted unconditionally to, or acquired unconditionally by it and are at the end of the previous year beneficially held by it.

It may be mentioned that section 23A ( 1), as it stood before the amendment by the Finance Act 1956, did not authorise amalgamation of the shares held by "relatives" as if they represented a single shareholder. It will, therefore, be a question of fact and a matter of inference in each case whether any "relatives" forming themselves into a company acted as a group or block in concert in controlling the affairs of the company.

Relationship would not, per se, lead to such a conclusion.

The Tribunal in its order observed :

"Sri A. K. Jain became major on 5-3-1952. Therefore, as at the end of the two previous years, his holding of

10,000 shares cannot ipso facto be amalgamated with the 'shareholding of Sri S. P. Jain as if he was the nominee of his father.

The shareholding of 10,000 shares by Mrs.

Rama Jain has also to be left out of account since, as already observed, there is no finding that Sri S. P. Jain provided the consideration for the acquisition of

I 0,000 shares held by her. Assuming, therefore, that Sri S. P. Jain was controlling shareholder, the shares held by the members of the 'public' which would include Sri A. K. Jain and Mrs. Rama Jain would be at least 22,000 shares".

In the supplementary statement of case filed by the Tribunal enclosing various orders and otller documents, it is shown that S. P.

Jain was Director of the company from August 3, 1950 to September 25, 1950. He was appointed Managing Director from Jnne 6, 1953, subject to approval of the Government.

A. K.

Jain was Director of the company from August 3, 1950 even when he was a minor (his date of birth being March 5, 1934) and was appointed Deputy Managing Director from June 6, 1953, subject to approval of the Government.

R. Sharma was Director from 3-8-1950 to

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7-9-1956.

He was Secretary of R._K. Dalmia and employee of Sahu A Jain Limited.

H. C. Jain was Director from 25-9-1950 to 25-3-1954.

He was Secretary of S. P. Jain and employee of Ashoka Agencies Limited.

From the above it appears that the Deputy Managing Director and the two other Directors held amongst themselves 10,000 shares B. and out of the balance 30,000 shares were held by the relations. of the Managing Director, namely, by the father, the mother and the minor brother.

It also appears that S. P. Jain along with Ashok Kumar Jain, R. Sharma and N. C. Jain were the promoters and subscribed to the Memorandum of Association at the start of the company in July 1950. It also appears Ashok Kumar Jain, Director, was getting a remuneration of Rs. 6,000/- per month w.c.f. Septem- C ber 1951 in accordance with the resolution passed in an extra-ordinary general meeting of the shareholders on October 1, 1951. At the meeting of the Board of Directors dated November 29, 1950, Ashok Kumar Jain and R, Sharma, Directors of the company, were authorised to execute managing agency agreements with different companies.

Ashok Kumar Jain was generally presiding over the meetings from November 1950.

The Tribunal further observed in its statement of case that -

"A perusal of the minutes or the proceedings of the general meetings does not lead to any inference that Sri S. P.

Jain, Smt. Rama Jain and Sri A. K. Jain were necessarily acting in concert. On the other hand, it appears that despite E his young age, Sri A. K. Jain seems to have been taking active interest in the management of the affairs of the assessee-company and the companies managed by it.

Unless it is to be presumed that because of relationship, Sri S. P. Jain,

Smt. Rama Jain and Sri A. K. Jain should be regarded as acting in concert, there is no other material on record on the basis of which such a conclnsion could be supported".

The Tribunal also observed :

"that in spite of opportunity afforded by the Appellate Assistant Commissioner, the Income-tax Officer had not brought on record materials to show that the voting rights of Mrs.

Rama Jain or Sri A. K. Jain were controlled by Sri S. P.

Jain".

The Tribunal concluded by observing that -

"The revenue had failed to establish that Sri S. P. Jain, his wife and his son Sri A. K. Jain were acting in concert".

Section 23A again came up for consideration before this Court in Commissioner of Income-tax, West Bengal v. East Coast Commercial

Co. Ltd. (I).

This Court made a reference to the Raglwranshi Mills' case (supra) where it was observed :

"The word 'public' is used (in the Explantion). in contradistinction to one or more persons who act m umons and among whom the voting power constitutes a block. If such a block exists and possesses more than seventy-five per cent of the voting power, then the company cannot be said to be one in which the public are substantially interested ..... . the test is first to find out whether there is an individual or group which controls the voting power as a block. If there be such a block, the shares held by it cannot be said to be 'unconditionally' and 'beneficially' held by members of the public".

This Court further observed :

" The Tribunal had to decide in the first instance whether there was a group of persons acting in concert holding a sufficient number of shares which may control the voting as a block.

But the existence of a block is not decisive. If there be a group of persons holding control over voting, the Company would still be a Company in which the public are substantially interested, if twenty-five per cent or more of the voting power has been allotted unconditionally to and beneficially held by the public and the shares were in the previous years subject of dealings in any stock exchange in the taxable territories or were in fact freely transferable by the holders to other members of the public.

The two enquiries are distinct".

\ ,

This Court further referred to Jubilee Mills' case (supra) and Raghu- + vanshi Mills' case (supra) and observed as follows :-

"But in Commissioner of Income-tax, Bombay City-I v.

Jubilee MU!s Ltd. (supra) this Court held that no direct evidence of overt act or concert between the members of the group having control over voting was necessary to prove that the Company was not one in which the public were substantially interested. It was observed. in Raghuvanshi Mills' case (supra) that 'in deciding if there is such a controlling interest, there is no formula applicable to all cases. Relationship and position as director are not by themselves decisive. If relative act, not freely, but with others, they cannot be said to belong to that body, which is described as 'public' in lhe Explanation'.

In Jubilee Mills' case (supra) this Court elaborated those observations and stated :

The test is not whether they have actually acted in concert but whether drcumstances are such that human experience tells us that it can safely be taken that they must

(1)[19671 1 s.c.R. s21.

be acting together. It is not necessary to state tbe kind of evidence that will prove such concerted actings. Each case must necessarily be decided on its own facts".

This Court finally in the above East Coast Commercial Company's case concluded as foUows :-

"On an analysis of the reasons recorded by the Tribunal and the High Court, it is clear that the Tribunal held that the Kedias did not form a controUing group because there was no evidence that they actuaUy controlled the voting, even though they held more than seventy-five per cent of the shares issued by the Company : the High Court observed that the members of the Kedia family held 4,016 shares of the Company and were in a position to control the affairs of the Company, but there was no evidence to show that they did in fact act in concert and controlled the affairs of the Company as a block. But, as already observed, if the members of the Kedia family formed a block and held more than seventy-five per cent of the voting power, it was not necessary to prove that they actuaUy exercised controlling interest. It is the holding in the aggregate of a majority of the shares issued by a person or persons acting in concert in relation to the affairs of the Company which establishes the existence of a block. It is sufficient, if having regard to their relation etc., their conduct, and their common interest, that it may be inferred that they must be acting together; evidence of actual concerted acting is normaUy difficult to obtain, and is not insisted upon".

We may also observe in passing that it does not appear that the East Coast Co_mmercial Company's case (supra) was referred to during the hearing in, nor was it noticed by, the High Court.

The Tribunal in the supplementary statement observed as follows:-

"Unless it is to be presumed that because of relationship, F Sri S. P. Jain, Smt. Rama Jain and Sri A. K. Jain should be regarded as acting in concert, there is no other material on record on the basis of which such a conclusion could be supported".

The High Court also observed to the same effect :

" It may be that in view of the relationship of the parties as to a group consisting of the father, two minor sons and their mother, a possible inference was that the relationship was such that they could reasonably be taken to be acting as a group in concert .... " but "the assessee could not be placed in the category of such a company accordingly because of close relationship".

Keeping in the forefront the test laid down by this Court in East Coast Commercial Company's case (supra), Mr. Seo on behalf of the

Revenue submitted for our consideration the following facts and circumstances from which, according to counsel, an inference can be reasonably drawn about the controlling power in a block confined to a family group holding more than 75 pr cent shares :

( 1) 80 per cent of the share capital ( 40,000 out of

50,000) is held by S. P. Jain, his wife and two sons, one of whom was a minor throughout the period of the two accounting years and the other son,

A. K.

Jain, for a portton of the period upto March 1952.

The remaining 20 per cent of the shares was held by the companies which were under the control by S. P. Jain and out of which 20 shares were held by two employees under the control of S. P. Jain.

(2) A. K. Jain was appointed as Director in the company in August 1950 when he was a minor, aged 16 years, and he became the Managing Director on 1-2-1954 at a salary of Rs. 6,0001per month.

According to counsel this could not have been possible if he was not the son of the controlling shareholder, S. P. Jain.

( 3) S. P. Jain who was a Director resigned making room for his Private Secretary N. C. Jain for appointment as Director. ( 4) During the assessment year I 953-54 the assessee company claimed Rs. 2,02,500/- as loss in a transaction in hesslan through Messrs Kabra & Co. in settlement of August 18, 1952, and the same amount was shown as profit in hessian through the same broker by Smt. Rama Jain wife of S. P. Jain in the settlement.

(5) S. P. Jain, A. K. Jain, R. Sharma and N. C. Jain were the promoters of the company and were the signatories to the Memorandum of Association.

Mr. Hardy, the learned counsel for the respondent, on the other hand, replied to the submissions as follows :-

(1) Rama Jain and A. K. Jain are independent assessees.

The minutes of the Board's meetings clearly show A. K. Jain as a competent Director taking independent decisions.

Mere relationship, therefore, would not lead to the conclusion that these two shareholders acted with S. P. Jain in concert.

He, however, admits that S. P. Jain may be said to control the voting power of the minor son, Alok Prakash Jain, as his natural guardian.

According to Mr. Hardy if Rama Jain and A. K. Jain are holding 20,000 shares out of 50,000, they cannot be held to be acting in concert with S. P. Jain and section 23A will not be attracted.

(2) With rerrard to the second submission of Mr. Sen,

Mr. Hardy submits that there is sufficient evidence

I I

in the record, which is even referred to in the further statement of the case, that A. K. Jain was an independent shareholder and was not under the control of S. P. Jain or any other Director or shareholder.

He further submits that there is no evidence whatsoever that the money for purchasing the shares of A. K. Jain or even of Rama Jain was advanced by S. P. Jain.

(3) With regard to the third submission of Mr. Sen, Mr.

Hardy had to admit that N; C. Jain was Director from 1950 to 1954 and S. P. Jain was Director from August 3, 1950 to September 25, 1950 and S. P. Jain became Managing Director of the company on June 6, 1953, subject to the approval of the Government on a remuneration of Rs. 8,000/- per month and A. K. Jain was appointed as Deputy Managing Director on a remuneration of Rs. 6,000/- per month subject to the approval of the Central Government (vide minutes of Board's meeting of June 6, 1953). According to Mr. Hardy, appointment of Directors or even Managing Director is a regular matter of the company and no particular significance should be attached to these appointments. ( 4) With regard to the fourth submission Mr. Hardy submits that such transactions are common with brokers and even the purchaser is not known in most of the cases. Hence no undue importance should be attached to the hessain transaction so as to influence the conclusion. It is also pointed out that there was no controversy about the genuineness of the hessian transaction.

We are of the view that the genuineness of the aforesaid transaction is, however, irrelevant for the purpose of considering its effect in acting in concert by the shareholders.

(5) With regard to the fifth submission Mr. Hardy submits that it i~ true that S. P. Jain, A. K. Jain. R.

Sharma and N. C. Jain were the promoters of the company but admittedly two of them, namely, R. Sharma and N. C. Jain were outsiders. That they were employees would not affect their character as shareholders of the company or even as Directors.

It is clear that this company was a family concern with only 20 shares out of 50,000 shares allotted to two outsiders who again happened to be paid employees. The presence of these two outsiders

ns of the least significance in the matter of management of the affairs of the company. It is true that most of the meetings of the ; Board of Directors were presided over by A. K. Jain with either of the two employees or one of them attending the same. It must however, be noted that A. K. Jain became a Director even when he' was a minor aged 16 years.

He would not ordinarily be able to play the role he is supposed to have done in the Board's meetings unless S. P.

Jain was confident that the Board was carrying out his mandates with regard to the affairs of the company. It is also true that A. K.

Jain and the other Directors were authorised to sign agreements on behalf of the company, but this is not of great significance since this was in pursuance of a decision of the Board's meeting which could not have been passed but for the concurrence of S. P. Jain. There is. no evidence w)latsoeve~ to show that Rama Jain, wife of S. P. Jain, was at all independently acting.

When a company is composed mostly of family members owning lion's share in the entire share capital of the company the onus to keep clear of the reach of section 23A(l) will be on the shareholders by adducing some positive evidence about the absence of control by the controlling shareholders.

So far as Rama Jain is concerned it is not possible to hold that S. P. Jain would not be able to control his wife's voting power along with that of his minor son, Alok Prakash Jain. It is true that mere relationship or being a Director is not decisive.

As a matter of fact no single factor can be, decisive but having regard to the totality of the circumstances revealed in the case and the conduct of the transactions of the company taken with the relationship which, in the circumstances of the case is not a negligible element, we are clearly of the opinion that it is a case in which it cannot be said that the 'public' is substantially interested in 25 per cent or more shares of the company.

Even if we allow A. K. Jain to be a member of the 'public', he only holds I 0,000 shares and taken with 2,000 shares of Ashoka Agencies Ltd., the total shareholding comes only to 12,000• shares, that is to say, 500 less than the minimum shareholding requisite to earn the benefit of the third proviso to section 23A read with the Explanation.

Further, between August 11, 1951 and May 1, 1952, A. K. Jain and two employee-Directors, the latter having a modicum of 10 shares each, apparently took all decisions for the company in the Board's meetings. This is not ordinarily possible but for collaboration with the major shareholders.

This is a case where more is meant than meets the eye. We are unable to hold in this case, in absence of any reliable evidence to the contrary, that the voting power of the three Directors was free and uninhibited and not within the orbit of control of the other major shareholders, S. P. Jain and Rama Jain acting in concert. It is a clear case of all the shareholders acting i11' concert and in unions and the two employee-Directors were merely dummies.

There is not the slightest inkling of 'public' being interested, far less substantially interested, in this company.

There was no one who could come within the term 'public' outside the ring of the shareholders acting in concert for their own ends with a common purpose.

There is no evidence whatsoever in this case that the shareholders did not cohere together in the matter of transaction of the company's affairs.

When the reality is manifest some reliable evidence within the special knowledge of the assessee must be forthcoming from its side to contradict the obvious in order to be covered! by the exception.

This has not happened in this case.

Unless the two employees were nominees of the major sharehold ers it is ordinarily absurd to suppose that they could aspire to be and become Directors of the company.

The Appellate Assistant Commissioner in his order, which is annexed with the statement of the case, mentions that-

"In fact Shri S. P. Jain as a controlling shareholder had brought himself in as a Director of the company right from the inception of the company and was the first Director of the company from 3-8-50 to 25-9-50.

From September '50 to March '54, however, he temporarily gave up the directorship by putting in an employee as a nominee-director, Sri N. C.

Jain, for the intervening period so that there may be no hitch in the appellant-company being appointed as Managing Agent of certain other companies under his control on which also Sri S. P. Jain was a Director, such as the Rohtas Industries Ltd., Bharat Collieries Ltd., S. K. G. Sugar Ltd., Dehri- Rohtas Light Railway Co. Ltd. and New Central Jute Mills Ltd. As soon as this objective was achieved, Sri S. P. Jain staged a come back as a Director of the appellant-company on 25-3-54 when the nominee-director Sri N. C. Jain resigned his directorship to make room for his master Sri S. P.

Jain".

The factual position, not the opinion, revealed in the above extract is more than eloquent with regard to the core of the company.

Having regard to the intimate relationship of the shareholders,

with not the least evidence of any disconcert amongst them, the rdi- E nary expectation for individual profit in commercial undertakings, natural reluctance to forego the same, the history of the company and its continued smooth working in a manner which is normally incon sistent with anything other than full unison amongst the shareholders in decisions about the conduct of company's affairs in common inter est of all, this was a company of one paramount mind operating with out the least doubt.

The Board's meetings are evidence of a well- F organised, well-knit close unity of views in all affairs and which in ordinary course of human conduct would not have been at all possible but for a single or concerted action in the company's management by a controlling group.

When all the above conditions are present in a company, the onus would be on the assessee to satisfy by some reliable evidence that what appears on the surface is that which is real.

That is not to say that the Revenue has no burd.en to bring the case G within the mischief of section 23A.

Application of law cannot be bereft of commonsense.

The object of section 23~ being to prevent avoidance of super-tax by the shareholders by p1lmg up the profits of the company in its own hands the facts and circumstances revealed in this case clearly bring the om pany within the reach of that section.

We are unable to accede to the submissio~ of Mr: Hardy in this case that because A. K. Jain ff

a, n~ Rma Jam wer~ mdepndent assessees and A. K. Jain was pres1dmg m the Board s meetings and as such was taking independent

A decisions and was also doing extra work for the company in Calcutta on salary basis, they should be held to be members of the 'pnblic' who were snbstantially interested in the company with the requisite shareholding for the purpose of the Explanation read with the third

provirn.

The High Court was, therefore, not right in answering the ques- B tion in favour of the assessee and against the Revenue. We, therefore, answer the original question in the negative and the revised question in the affirmative both in favour of the Revenue.

The appeals are allowed but we leave the parties to pay and bear their respective costs.

P.H.P.

Appeals allowed.

COMMISSIONER OF INCOME TAX BIHAR, PATNA

SAHU JAIN LIMITED

February 16, 1976

P. K. GOSWAMI

S. MURTAZA FAZAL ALI, JJ.

Tax Act, 1922

Section 23A(l)

S. P. Jain

s. 23A

s. 23A

s. 23A

Rama Jain

A. K. Jain

S. P.

Jain

S. P. Jain

R. Sharma

N. C. Jain

Rama Jain

A. K. Jain

Central Government

s. 23A

s. 23A

Ashoka Agencies Limited

s. 23A

August 11, 1951

May 1, 1952

CIVIL APPELLATE JURISDICTION

Patna High Court

B. Sen

A. Ramachandran

S. P. Nayar

Hardayal Hardy

Bishamber Lal

GOSWAMI

section 66

Indian Income-tax Act, 1922

August 31, 1952

August 31, 1953

Ashok Kumar~Jain

R. Sharma

N. C. Jain

Alok Prakash Jain

Rishabh Investment Ltd.

Dal mi a Jain Co. Ltd.

Universal Bank

Ashoka Agencies Ltd.

Alok Prakash Jain

Ashok Komar Jain

Ashok Kumar Jain

Rishabh Investment Ltd.

Dalmia Jain Co. Ltd.

Universal Bank of India Ltd.

Income-tax Act, 1922

Finance Act 1955

Ashoka Agencies Ltd.

section 23A

section 23A

January 26, 1961 (7)

section 23A

Bihar

section 23A

Income-tax Act

Supreme Court

Shrimati Rama Jain

Ashok Kumar

[1961] 2 S.C.R. 978

September 30,

1966

Section 66(1)

section 66(2)

section 66

Sen

section 23A

section 23A

Section 23A

section 33A

section 23A

Finance Act 1956

August 3, 1950

September 25, 1950

A. K.

Jain

June 6, 1953

R._K. Dalmia

Sahu A Jain Limited

H. C. Jain

S. P. Jain

October 1, 1951

November 29, 1950

R, Sharma

Section 23A

Raglwranshi Mills

Jubilee Mills

Raghu- + vanshi Mills

Raghuvanshi Mills

East Coast Commercial Company

Kedia family

East Coast Co_mmercial Company

Seo

Messrs Kabra & Co.

August 18, 1952

Hardy

section 23A

N; C. Jain

R.

Sharma

section 23A(l)

section 23A

N. C.

Jain

Rohtas Industries Ltd.

Bharat Collieries Ltd.

S. K. G. Sugar Ltd.

Dehri- Rohtas Light Railway Co. Ltd.

New Central Jute Mills Ltd.

section 23A

section 23

Calcutta