TEA ESTATE INDIA (P) LTD. v.

COMMISSIONER OF INCOME-TAX

April 26, 1976

[H. R. KHANNA AND P. K. GOSWAMI, JJ.]

4 " Income Tax Act 1922-Sec. 2(1), 2(4A), 2(6C), 2(3)(8) and 2(6A) C.

Incon1e Tax Rules 1922-Rules 23 and 24-Dividends-Accumulated profits -Conzposite business activity including a!ricultural and non-agricul1ural- Exccss over book value on Land account-Profit and loss account-General restTve account and reserve created on revaluation whether accumulated profits -Interpretation of statutes-Whether court can add words to a section.

The assessee company held ertain shares in Dibru Darang Tea Co. Ltd. (D.D.T. Company) and Taikron Tea Company Ltd. (IT Company). Both the companies were companies growing, manufacturing and s~Uing tea and

owned large tea estates consisting of land, building plant, machinery etc. In 1

1947. both the said companies soid their entire tea estates including all assets !" to Brooke Bond Estate India Ltd. Consequently DDT Company recived a surplus is R!;. 17,18,081/- over the book Value of its assets. 'fhe amount reialing to the land of D1DT Company was Rs~ 19,30,374/- and that retaang D to the T.T. company was Rs. 10,11,216/-. Both the companies went into voluntary liquidation in 1954. On account of the liquigation of the two companies tne assessee company became entitled to receive Rs. 57,69,186/- out of the total distributable assets of DDT Company Hlld Rs. 36,53,453/- out of the total distributable assets of T:f. Company,

Section 2(1) defines agricultural income. Section 2(4A) defines capital asset to mean property ot any kind held by an assessee whether or not connected with his business, profession or vocation but does not include any E land from which the incon1e derived is agricultural income. It was defmed to include any distribution made to the shareholders of a co1npany on its liquidation to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not. Explanation provides that expression "accumulated profits" shall not include capital gain arising during certain periods. The income has been defined by s. 2(6C) to include dividend.

Section 2(3)(8) provides that _agricultural income shall not be included in the total income chargeable to F tax under s. 3 of the Act. Rule 23 provides for assessment of income which is partly agricultural income and partly income chargeable to income tax.

Rule 24 provides that income derived" from the sale of tea grown and manufactured by the seller in the taxable territories shall be computed as if it were

incom:e derived from business and 40 per cent of such income shail be deemed to be income, profits and gains liable to tax.

The assessee contended before the Income Tax. Officer that apart from Rs. 2.47,921/- which had been assessed as capital gain under s. 12B of G Income Tax Act 1922 in respect of T.T. company, no other amount could be included in the computation of the accumulated profits available for distribution under s. 2(6A) (c) of the Act. The Income Tax Officer rejected the claim of the assessee.

On an appeal, the Appellate Assistant Commissioner rejected the main claim of the assessee.

On further appeal the Tribunal held as far as item I (land) and item 4 (reser\"e on revaluation) are concerned that since the lands of the two tea

states were utilised for producing and selling tea it cannot be said that the H said assets were lands Jrom which the income derived was agricultural income.

A.t best, what could be said is that barring 40 per cent of such income the balance was agricultural incont.e.

As far as item 2 (profit and loss a/c) 12-833Sup Cl/76

146 SUPREME COURT REPoRTS

(1976] SUPPLEMENTARY

an<l item 3 (general reserve) are concerned, the Tribunal held that the ratio of 60 : 40 as laid down in rule 24 of the Income Tax Rules, 1922 could not be applied for finding out the proportion of accumulated profits in a tea business and that profits whether capitalised or not did not admit of such a bifurcation for the determination of accumulated profits. The rribunal held that the general and taxation reserves were accumulated profits and the share received by the assessee compa!l-Y on the distribution of such accuµiulated profits was taxable as dividend within the maning of s. 2(6A)(c) of the

Act. '

Both the assessee as well as Revenue approached the High Court in two references arising out of the judgment of the Tribunal.

The High Court held : •

( 1) Regarding item No. 1 and 4 the excess of the prices is not profit 9f the businss, unless such apprec1at1on has been included in the capital gains. The High Court arrived at certain figures of excess profit which was included in the computation of capital gains and held that only that figure was iflcludible

in the accumulated profits \Vithin the meaning of s. 2(6A) (c).

(2) Regarding items 2 and 3 the High Court held that the balance in the profit and losis account is arrived at after deducting or providing for all outgoings including the etimated liability for both the income tax and agricultural income tax. Therefore, the balance carried to the balance sheet is pure profit, l.e., the accumulated profit. The High Court negatived the contention that each item in the balance sheet contains in itself the proportion of the income attributable to business activity and to the agricultural activity of the companies or that they must be disintegrated into 6 components parts at the time of inclusion in dividends. Tea companies carry on a business activity though such activity may include agricultural operation as part thereof.

Overall excess of incomings over outgoings as reflected in the balance of profit and loss account would represent the commercial profits of the business undertaking and though a bifurcation i~ necessary for the purpose of assess1nent and imposition of tax, no further bifurcation could be made once the balance of profit was finally detemined.

in appeals filed by both the assessee and Revenue by special leave the assessee contended that 60 per cent of the amounts mentioned in items 2 and 3 were agricultural income and as such, were not income for the purpose of the Act. To that extent the said amount did not constitute accumulated profits \Vithin the meaning of s. 2(6A)(c). Revenue contended that 40% of income de-rived in respect of item 1 not being agricultural should be held to be capital asset and, therefore, accumulated profits.

Dismissing both the appeals,

HELD: (I) Clause 2(6A)(c) provides that dividend shall include any distribution made to the shareholders of a company on its liquidation to the extent to which the distribution is attributable to the accumulated profits of thecompany immediately before its liquidation whether capitalised or not. rhe proviso is, however, to the effect that only the accumulated profits so distributed which arise during the 6 previous years of the company preceding the date-of ]iquidation shall be so included. 60 per cent of the: profits made by both the companies by sale of tea grown and manufactured by them were not liable to be taxed in view of rule 24.

However, once those profits got accumulated with the two companies they became accumulated profits 'vithin the meaning of s. 2(6A)(c). The contention of the assessee that only 40 per

; ent of the profits which got accumulated were liable to be taxed and therefore only 40 per cent should be treated as accumulated profit for the purpose of

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•· 2(6A)(c) cannot be accepted. The assessee wants to add to s. 2(6A)(c) A the following words :

"as are liable to be taxed under the Act" It is not permissible for us to construe the clause by adding those words. (152 F-G, 154 G-H, 155 A-Bl

(2) The decision of the case in Mrs. Bacha F. Guzdar, Bombay v.

Commissioner of Income Tax, ombay-27 I.T.R. 1, followed \vith approval. (155 El B ( 3) The contention of the Revenue that the land in question to the extent of 60 per cent would not answer the description of capital asset, and as 40 per cent of the income derived from that land was not agricultural income

40 per cent interest in that land should be held to be capital asset for the purpose of s. 2( 4A), is not well founded. The income which is realised by sale Of tea by a tea company which grows tea on its land and thereafter subjects it to manµfacturing process in its factory is an integrated incoine consisting of agricultural and non-agricultural components. Rule 24 prescribes the formula C which should be 3.dopted for apportioning the income realised as a result of the sale of tea after it is grown . apd subjected to manufacturing process in the factory. So far as the lands held by the company were concerned they yielded purely agricultural income in the shape of green tea leaves. 40 per cent of the income on sale of tea which was received by both the companies was not income from land. It was income which could be ascribed to manufacturing process to which the green tea leaves were subjected in the factories of those coljlpanies. As the lands held. by both the companies yielded agricultural D income it would follow that those lands did not constitute capital asset as defined in s. 2(4A). Section 2(4A) expressly states that capital asset does not include any land from which income is derived as agricultural income.

Any gain arising from the transfer of such land would not constitute ca.ipital

gain under the Act and consequently would not be liable to be taxed as such.

[155 H, 156 A-D, 157 BD] CNIL APPELLATE JURISDICTION : Civil Appeal Nos. 1491 and 1693 of 1971.

E Appeals by Special Leave from the Judgment and Order dlj,(ed the 13th January, 1971 of the Calcutta High Court in I.T. Reference No. 192 of 1966.

K. Ray and D. N. Gupta, for the Appellant in CA No. 1491/71 for respondent in C.A. 1693/71.

Hardayal Hardy, B. B. Ahuja and S. P. Nayar for Respondent in CA1491/71 and for Appellant in 1693/71.

The Judgment of the Court was delivered by

KHANNA, J .-This judgment would dispose of two cross civil appeals Nos. 1491 and 1693 of 1971 which have been filed by special l~~ by the assessee, M/s Tea Estate India (P) Ltd., and the Com- G m1Ss10ner of Income-tax. West Bengal respectively against the judgment of the Calcutta High Court answering the following question Nferrcd to it under section,66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act) partly in favour of the assessee and partly in favour of the revenue :

"Whether on the facts and in the circumstances of the H case, the balances in the undernoted accounts are includible in the 'accumulated profits' within the meaning of section 2(6A) (c) and if so, to what extent?

Land A/o

Profit & Loss Account

General Reseves and liabilities for taxation

Dibru Darang Tea Co. Ltd.

Rs. 19,30,374/-

16,69,285/-

3,50, 799/-

Reserve created on writing up the value of the assets of the ten estates 15,69,828/-

Taikrong Tea

C:o. Ltd.

Rs. 10,11,216/-

18,73,125/-

2,243/-

58,772/-.

The matter relates to the assessment year 1956-57, the corresponding accounting year for which ended on Jnne 30, 1955.

The assessee company held 52,350 shares out of the total issued shares of 54,600 in Dibru Darang Tea Co. Ltd. (hereinafter referred lo as DDT Co.) and 22,998 shares out of the total issued shares of 23,000

in Taikrong Tea Co. Ltd. (hereinafter referred to as TT Co.). DDT Co. and 1T Co. were tea companies growing, manufacturing and selling tea.

For this purpose, those two companies owned large1 tea estates consisting of land, buifding, plant and machinery. On August 11, 1947 the said tea companies sold their entire tea estates, including all the assets, to Brooke Bond Estate India Ltd_. As a result of these sales, DDT Co. received a surplus of Rs. 17,18,081 over the book value of its assets.

Likewise, TT Co. received a surplus of Rs. 13,11,339 over the book value of its assets. The amount relating to the land of the tea estate of DDT Co. was Rs. 19,30,374 and that relating to TT Co. was Rs. 10,11,216.

DDT Co. realized Rs. 2,12,313 less than their book value on the sale of the other assets.

It may also be mentioned that in 1936 the assets of the two companies were revalued.

On such revaluation the book value of the assets of DDT Co. apprcciat:xl. by an amount of Rs. 15,69,828 and those of TT Co. by an amount of Rs. 58,772. These amounts were carried to the respective reserves of the two companies.

DDT Co. and TT Co. went into voluntary liquidation on October 29, 1954.

On account of the liquidation of the two companies, the assessee company became entitled to receive Rs. 57,69,186 out of the total distributable assets of DDT Co. and Rs. 36,53,453 out of the total distributable assets of TT Co.

During the relevant accounting period the asscssce received Rs. 52,23,786 and Rs. 34,15,500 (in all Rs. 86.39,286) from the liquidators of DDT Co. and TT Co. respectively.

On behalf of the assessee company, it was urged before the lncome-tax Officer that apart from Rs. 2,47,921 which had been assessed as capital gain under section 12B of TT Co. for the assess- 1mnt year 1949-50, no other amount could be included in the computation of the accumulated profits available for distribution under section 2(6A) (c) of the Act.

The Income-tax Officer rejected this

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contention and allowed only a deduction of Rs. 27,000 being payment on share premium account and included the balance of Rs. 86,11,986 (grossed up to Rs.

9L64,075) as the assessee's dividend income under section 2(6A)(c) of the. Act.

On appeal the Appellate Assistant Commissioner allowed a further deduction of Rs. 1,77,964 representing pre-incorporation B advances in the case of TT Co. The Appellate Assistant Commissioner rejected all other contentions of the assessee, including the contention that 60 per cent of the amounts appearing under the head "balance of appropriation account" in the balance-sheets as also the general reserves and liabilities for taxation appearing in the books of the two tea companies should be excluded from the computation of accumulated profits.

On further appeal before the Tribunal, two main contentions were raised on behalf of the assessee : (I) that in determining the quantum of the accumulated profits, the surplus arising from sale of lands of the two tea estates as also the reserves created on the revaluation of the agricultural assets should be left out, and (2) that only 40 per cent of the balance in the profit and loss account and the D general reserves of the two companies should 'be included, as only 40 per cent of thes" amounts had been assessed under the Act.

Regarding the first contention. the Tribunal observed :

"In the case before us, since the lands of the two tea estates were utilised for producing and selling the tea, it cannot be said that the said assets could be termed as 1and from which the income derived was agricultural income'.

At best what can be said is that barring 40% of such income the balance was airricultural income.

We must, therefore, hold that only 40% of the profits derived on sale of the land of tea estates as also the reserves created on writing up the value of the assets of the land of the tea estates was referable to IRnrl from which income derived was agricultural income.

To that extent. therefore. the total of the profit on sale of the land of tea estates and reserves created on revafoation were to be excluded in comnuting the accumulated profits for finding out the section 2(6A)(c) dividend."

Dealing with the second contention of the assessee. the Tribunal observed that the ratio of 60 : 40 as lair! down in rule 24 of the Income-tax G Rules, 1.922 could not be anplied for finning out the nroportion of

ccumulated profits in a tea business and that profits, whether capital1serl or not. did not 3dmit of such a bifurcation for determinatio,., of accumulated profits.

Genera! and taxation reserves having been inclutled in the pool of distributable surplus could. in the ooinion of the Tribunal, only be held to be excess provisions out of the profits of the two -tea cpmpanies which were not required to be oaid out in H discharge of anv 'liabilitv. The Tribunal accordingly held I.bat bafance left over. after making the deduction indicated above from the total distributable pool; was accumulated profits of the two tea companies

A and the share received by the assessee on distribution of such accumulated profits was dividend within the meaning of section 2(6A)(c) of the Act.

Accumulated profits in the case of two tea companies immediately before the liquidation were determined as under :

"DDT Co.

40% of (Rs. 19,30,374+Rs. 15,69,828) +the whole of (Rs. 16,69,285+Rs. 3,50,799)=Rs. 34,20,165.

TT Co.

40% of (Rs. 10,11,216+Rs. 58,772) +the whole of (Rs. 18,73,125+Rs. 2,243)=Rs. 23,03,363." The Tribunal accordingly came to the conclusion that out of the distributable surplus, an amount of Rs. 57,23,528 was attributable to accumulated profits and hence was dividend within the meaning of section 2(6A)(c) of the Act. The assessee's appeal was allowed to that extent.

Both the assessee company as well as the Commissioner applied to the Tribunal for reference of certain questions arising from the order of the Tribunal to the Court.

The Tribunal thereupon referred the question reproduced above in a composite reference to the High Court.

Dealing with items 1 and 4 mentioned in the question, the High Court held as under : - ' E

"As both the learned counsel agree that the same treatment should be given to the reserves created on writing up the value of the assets as to the excess and/ or profit realised on sale either of the lands or of the assets of the tea estates, it should be sufficient to consider the case of such excess arising from the sale and/or transfer by the two tea companies. Whether the excess of the price realised over the book value of the lands as shown in the land account balance and as envisaged in the question referred or whether the excess on the sale of the entire tea estates over the book value of the assets are to be considered for inclusion in the 'accumulated profits' under section 2(6A)(c), there can be no doubt that such excess or profit is a realisation of capital rise and not profit of the business.

As according to the decision of the Supreme Court in Short Brothers'(!) case, unless such appreciation has been included in capital gains, distribution thereof by the liquidator will not be deemed to be divided for the purpose of the Income-tax Act, we have to find out how much of such excess or profit has been included in the computation of capital gains of the two tea comoanies on the transfer of the tea estates in 194 7.

In his order the Appellate Assistant Commissioner has recorded that for the assessment year 1949-50 the assessment order on Dibru Darang Tea Company Ltd. showed that the com-

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pany was not liable to capital gains tax, while the assessment order for that year of M/s. Taikrong Tea Co. Ltd. showed that a sum of Rs. 2,47,921 was brought nnder tax nnder the head of 'Capital gains.' It must, therefore, be held that it is only the sum of Rs. 2,47,921 which could be included in accumulated profits' for the purpose of determining the dividend under section 2(6A)(c). Mr. B. L. Pal contended that there was no conclusive finding in the order of the Appellate Asistant Commissioner as to the capital gains of the two tea companies in respect of the trausfer of the tea estates and the proper determination of capital gains payable in respect thereof had not been established.

We are unable to accept this contentions. Accordingly, so far as the first and last items in the referred question are concerned the answer would be that only the sum of Rs. 2,47,921 was incl4dible in the accumulated profits within the meaning of section 2(6A)(c) ." Regarding items 2 and 3 in the question the finding of the High Court was as under :

"The balance in the profit and loss account is arrived at ater deducting or. providing for all outgoings including the estimated liability for both income-tax and agricultural income-tax. Therefore, the balance carried to the ba!ancesheet is pure profit, that is to say, the commercial profit of the undertaking. We are unable to accept Mr. Ray's contention that each item in the balance-sheet contains in itself the proportion of the income attributable to the business activity and to the agricultural activity of the tea companies and must be distintegrated into jts component parts at the time of inclusion in dividends.

Tea companies carry on a business activity though such activity may include agricultural operation as part thereof. Overall excess of incomings over outgoin!(S, as reflected in the balance of profit and loss account, wou1d represent the commercial profits of the business undrtaking of the tea companies and though a bifurcation is necessary for the purpose of assessment and imposition of tax no futrher bifurcation could be made once the balance of profit was finally determined of such balance it could not be said that a part represents agricultural income and the rest represents income from busines~. So far as the

eneral and taxation reserve is co11cerned, Mr. Ray agrees that such reserve is usually built up out of the profits to meet future liabilities but contends that ns in this case also such reserve had been built up of l)O per c~.nt. agricultural profit

such reserve should again be disintegrated into the component pa~ .• We are entirely unable to accept this contention. As pomteo out by Mr. Pal, the Supreme Court in Girdhardas's(') case advocated disintegrath1n of the amount distributed into two components, namelv. capital and accumulated profits.

There is no scope for further distintegration of profits into its component parts."

(I) 63 I. T. R. 300 . .

The amounts mentioned in terms 2 and 3 of the question were accordingly held to be wholly includible in the accumulated profits within the meaning of section 2 ( 6A) ( c) of the Act.

Before dealing with the contentions advanced by the counsel for the parties, it would be convenient to set out the relevant provisions of the Act.

Section 2(1) defines "agricultural income" to mean, inter alia. \ "(a) any rent or revenue derived from land which is used for agricultural purposes, and is either assessed to land-revenue in the taxable territories or subject to a local rate assessed and collected by officers of the Government as such;

(bj any income derivd from such land by-

(i) agriculture, or

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed

J)y a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market, or

fiii) the sale by a cultivator or receiver of rent-inkind of the produce raise:! or received by him, in respect of which IK> process has been performed other than a process of the nature described in sub-clause (ii);

(c) ...... . . . . . . . . . . . . "Capital asset" in section 2 ( 4A) .nwns property of any kind held by an assessee, whether or not connected with his bµsiness, profession or vocation, but does not include-

(i) . . . . . . . . . . . . . . . . . ...... . (ii)

(iii) any land from which the income derived is agricultural income.

"Dividend", according to section ~(6A)(c), includes "any distribution made to the shareholders of a companv on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not" The explanation to dause 2(6A) reads as under :

"Explanation.-The expression 'accutnu1ated profit~, wherever it occurs in this clause. shall not 1nclmle capital gains arising before the 1st day of April 1946, or after the 3 !st day of March 1948, and before the 1st day of April 1956."

"Income" has been defined in section 2 ( C6) to include dividend. "Total income" has been defined in section 2(15) to mean the total amount of income, profits and ;; ains referred to sub-section (1) of section 4 computed in the matter laid down in the Act.

Section 3

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provides inter alia. that income-tax sall be charged for .a '.!er in respect of the total income of the prev10us year of every md1v1dual and company. . Section 4 relates to total inome of a previous year of :iny person.

According to clause (8) of sub-section (3) of that section, agricultural income shall not be included in the total income chargeable to tax under section 3 of the Act.

Sectim1 6 enumerates the six heads of income to be :

(i) salaries, (ii) interest on securities, (iii) income from property. (iv) profits and gains of business, profession or vocation, ( v l income from other sources, and (vi) capital gains.

According to section 12(1A), in::ome from other sources shall include dividends. Under section 12B, as it stood at the relevant time, capital gains t2x shall be charged in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset affected after the 31st day of March 1946 and before the 1st day or Aj)ri! 1948 and such profits and gains shall be deemed to be income of the previous year in which the sale, exchan§:e, relinquishment or transfer took place.

Section 59 empowers the Central Board of Revenue, subject to the control of the Central Government, to make rules for carrying out the purposes of the Act.

Indirn1 Income-tax Rules, 19'.!2 were framed in pursuance of that section. Rule ?.3 of the said rules provides for assessment of income which is partly agricultural and partly income chargeable to income-tax. Rule 24, with which we

'""" are concerned, reads as under :

"Income derived from the sale of tea grown and manu- E factured by the seller in the taxable territories shall be computed as if it were income derived from business, and 40 per cent., of such income shall be deef!led to be income, profits and gains liable to fax ...... "

There is a proviso to this rule, but it is not necessary to reproduce the same.

In appeal filed by the assessee-company, its learned counsel, Mr.

ay, has contended before us in respect of items 2 and 3 of the quest10n that 60 per cent of the amounts mentioned in these items were agricultural income and as such were not income for the purpose of

r the Act.

To that extent, it is urged the amounts did not constitute accumulated profits within the meaning of section 2(6A)(c) of the Act.. The High Court, according to the contention, was ih error in holdmg to the contrary. Tue above contentions has been controverted by Mr. Hardy on behalf of the revenue and, in our opinion, is not well founded.

In Inland Revenue Commissioners v. George Burrell(') it was held. that super-tax was not payable on the undivided profits, of past years ad _of the year in which the winding up of a company occurred were dJstnbuted among the shareholders, because in the winding up

(!) [1924! 2 K. B. 52.

they had ceased to be profits and were assets only. It was further observed in Burrell's case that the only thing the liquidator of a company in liquidation may do is to tnrn the asset5 into money, and divide the money among the shareholder~ in proportion to their shares.

Surplus of trading profit made in a particular year are distributable rateably among all the shareholders as capital, and it is not right to split up the sums received by the shareholders into capital and income, and thus disintegrate the sums received by the shareholders subsequently into component parts based on an estimate of what might possibly have been done, but was not done. A> the Indian Companies Act, l 913, closely followed the scheme of the English Companies Act, and the view expressed in Burrell's case (supra) applied to the Indian Income-tax Act, a special definition of "dh, idend" was devised by the legislature by the enactment of the Income-tax (Amendment) Act 7 of 1919 with a view to undo the effect of Burrell's (supra) case.

Clause (c) of sub-section (6A), as originally enacted, stood as follows

" 'Dividend' includes-

( c) any distribution made to the shareholders of a com-· pany out of accumulated profits of the company on the liquidation of the company :

Provided that only the accumnlated profits so distributed which arose during the six previous years of the company preceding the date of liquidati011 shall be so included."

By the Finance Act, 1955, the proviso to sub-clause (c) of clause (6A) was omited.

There was a further amendment made by the , Finance Act, 1956, and clause (c) to the amended section read as follows

" 'Dividend' includes- ( c) any distribution made to the shareholders of a com- . pany on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not." As a result of the abOV\l, distribution which is attributable to the accumulated profits of the compauy immediately before its liquidation is deemed to be dividend and as such liable to be taxed.

Sixty per cent of the profits made by DDT Co. and TT Co. by sale of tea grown and manufactured by them were not liable to be taxed under the Act in view of rule 24 of 1922 Rules because they were to be treated as agricultural income of these two companies.

The question with which we are concerned, however, is that even though 60 per cent of the said profits constituted agricultural income in the hands of DDT Co. and TT Co., once these profits got accumulated with those two companies, did they answer to the description of "accumulated profits" as used in the definition of dividend in section 2(6A) (c)?

The answer to this question, in our opinion, should plainly be in the affirmative. We are unable to accede to the contention of Mr. Ray that as only 40 per cent of the profits which got

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accumulated were liable to be taxed in the hands of DDT and TT com- A panies under the Act and 60 per cent were not liable to be so taxed, only 40 per cent of the amount of accumulated profits should be treated as accumulated profits for the purpose of section 2 ( 6A)( c). The acceptance of the contention would necessarily postulate .reading in section 2(6A)(c) the words "accumulated profits as are hable to be taxed under the Act". The words "as are liable to be taxed under the Act" are not there in the definition and it would not, in our opinion, B be permissible to so construe the clause as if those words were a part of that clause.

There is also nothing in the language or context of that clause as would warrant such a construction. Acmmulated profits would retain their character as such even though a part of them were not taxed as profits under the Act. It is pertinent to mention in this connection that we are concerned in ihe appeal of the assessee with items 2 and 3 of the qnestion which relate to accumulated profits in C the ordinary sense and not to accumulated profits arising out of capital gains which are dealt with by the explanation to section 2( 6A) of the Act.

There can also be no doubt that whatever amount has been distributed to the assessee company and is attributable to accumulated profits in items 2 and 3 mentioned in the question would constitute dividend in the hands of the assessee and the whole of the amount so received would be liable to be taxed as such. This is clear from the Constitution Bench decision of this Court in the case of Mrs. Bacha F. Guzdar, Bombay v. Commission£r of Income-tax Bombay('). The

~ assessee in that case was a shareholder in certain tea companies, 60

per cent of whose income was exempt from tax as agricultural income under section 4(3) (viii) of the Indian Income-tax Act. The assessee claimed that 60 per cent of the divide.nd income received by her on her shares in those companies was also exempt from tax as agricultural income.

This claim wa.s rejected and it was held that the dividend inconie received by the assessee was not agricultural income but was income assessable under section 12 of the Act.

Agricultural income as c!efined in the ct, according to that decision, was intended to refer to revenue received by direct association with the land which is used for agricultural purposes and not :, y indirectly extending it to cases where that revenue or part thereof changes hands either by way of distribution of dividends or otherwise .

Mr. Ray has assailed the correctness of the view taken by the ' Constitution Bepch of this Court in tl1e above decision and bas submitted that the matter should be reconsidered. Apart from the fact that this Bench is bound by the decision of the Constitution Bench, we find nothing in that decision us warrnnts reconsideration of the matter.

We would, therefore, uphold the answer given by the High Court in re&pect of items 2 and 3 of the question.

In appeal by the Commissioner of Income-tax his learned counsel Mr. Hardy, ha~ submitted in respect of items 1 and 4 that as 60 pe; cent of the income from the land held by DDT Co. and TT Co. was H to be treated as agricultural income in view of rule 24 of 1922 Rules,

(1) 27 I.T.R. 1.

15 6

SUPREME COURT REPORTS [l 976] SUPPLEMENT.\RY

the said land to the extent of only 60 per cent would not answer to the description of capifal asset as defir.ed in section 2 ( 4A) of the Act.

As 40 per cent of the income derived from that Jami was not agricultural income, 40 per cent interest in that land, according to the submission, should be held to be cap; tal asset for the purpose of section 2( 4A) of the Act.

Forty per cent interest in that land, it is fnrther submitted, would not be taken out of t11e definition of capital by virtue of clause (iii) of section 2(4A) and any appreciation in the value of the land to the extent of 40 per cent would constitute capital gain. As such gain arose during the period from April 1, 1946 to March 31, 1948, the same, according to Mr. Hardy, would answer to the description of accumulated profits as mentioned in the explanation to section 2(6A) of the Act.

The above contention of Mr. Hanly, in our opinion, is not well founded.

Income which is realised by sale of tea by a tea company which grnws tea on its land and thereafter subjects it to manufacturing process in its factory is an integrated income. Such income consists of two elements or components.

One element or component consists of the agricultural income which is yielded in the form of green leaves purely by the land over which tea plants are grown. The second element or component consists of non-agricnlturnl income which is the result of subjecting green leaves which are plucked from the tea plants grown on the land to a particular manufacturing process in the factory of the tea company. Rule 24 prescribes the formula which should be adopted for apportioning the income realised as a result of the sale of tea after it is grown, and subjected to the manufacturing process in the factory.

Sixty per cent is taken to be agricultural income and the same consists of the first element or component, while 40 per cent represents non-agricultural income and the same comprises the second element or component.

We are fortified in the above conclusion by two decisions of this Court in the cases of Karimtharuvi Tea Estates Ltd. v. State of Kercila(') and Anglo-American Direct Tea Trading Co. Ltd. v.

Commissioner of Agricultural lnC'Jmetax, Kerala( 2). In the case of Karimtharuvi Tea Estates Ltd. it was observed while dealing with the income derived from the sale of tea grown and manufactured by the seller in the context of rule 24 :

"Of the income so computed, 40 per cent is, under rule 24, to be treated as income liable to income-tax and it would follow that the other 60 per cent only will be deemed to be 'agricu1tural income' witl)_in the meaning of that expressiun in. the Income-tax Act."

In the case of Anglo-American Direct Tea Trading Co. Ltd. the Constituti0n Bench of this Court held that income from the sale of tea grown and manufa_ctured by the assessee is derived partly from business and partly from agriculture.

This income has to be computed as if it were income from business under the Central Income-tax Act H and the Rules made thereunder. Forty per cent of the income or com-

(!) 48 I.T.R. 83

(2) 69 I.T.R. 667,

' I

j •

- '

puled is Cieemed to be income derived from business and assessable to non-agricultural income-tax.

The balance of 60 per cent of the income , o comruted is agricultural income within the meaning of the Central Incomtax Act.

So far as the lands held by DDT Co. and TT Co. were concerned, they yieldec'i purely agricultural income in the shape of green tea leaves. Forty per cent of the income on sale of tea which was received by DDT Co. and TT Co. was not income from land. It was income which should be ascribed to manufactming process to which the green tea leaves were subjected in the factories of those companies. As the lands held by DDT Co. and TT Co. yielded agricultural iucome, it would follow th:J.t those lands did not constitute capital asset as defined in section 2(4A) of the Act. Clause (iii) appended to section 2(4A) expressly states that capital asset does not include any land from whicl1 income derived is agricultural income. Any. gain arising from the transfer of such land would not constitute capital gain under the Act and consequently would not be liable to be t_axed as such. The distribution of that amount on the liquidation of the companies would also not partake of the character of dividend. It may be apposite in th1q context to refer to the case of First Income-tax Officer, Salem v.

Short Brothers (P.) Ltd. (supra) wherein this Court dealt with the sale of a coffee estate by a compa11y which went into liquidation. It was held by this Court that the capita! appreciation in respect of the lands lrorn which the income was derived as agricultural income and was not taxable in the hands of the company as capital gains would " not on distribution be liable to be '° taxed as dividend under section 12 of the Act. We, therefore, see no reason to interfere in the appeat filed by the Commissioner of Income-tax with the answer given by the High Court in respect of items 1 ; md 1 of the question. It is the common case of the parties that items I and 4 share the same fate.

As a result of the above, we dismiss both the appeals.

In view of the divided success, we leave the parties to bear their own costs of both t1; e appeals.

P.H.P.

Appeals dismissed.

TEA ESTATE INDIA (P) LTD

COMMISSIONER OF INCOME-TAX

H. R. KHANNA

P. K. GOSWAMI, JJ.

Income Tax Act 1922

Tax Rules 1922

Section 2(1)

Section 2(4A)

s. 2(6C)

Section 2(3)(8)

s. 3

s. 12B

Income Tax Act 1922

s. 2(6A)

Income Tax Rules, 1922

s. 2(6A)(c)

s. 2(6A)

s. 2(6A)(c)

Clause 2(6A)(c)

s. 2(6A)(c)

s. 2(6A)(c)

s. 2( 4A)

s. 2(4A)

Section 2(4A)

Indian Income-tax Act, 1922

section 2(6A)

section 12B

section 2(6A)

section 2(6A)(c)

section 2(6A)(c)

section 2(6A)(c)

section 2(6A)(c)

section 2(6A)(c)

Income-tax Act

section 2(6A)(c)

section 2(6A)(c)

section 2

Section 2(1)

section 2

section 2

section 2(15)

section 4

Section 3

Section 4

section 3

section 12(1A)

section 12B

Section 59

section 2(6A)(c)

Companies Act

Companies Act

Income-tax Act

By the Finance Act, 1955

Finance Act, 1956

section 2(6A)

DDT and TT com- A panies under the Act

section 2

section 2(6A)(c)

section 2( 6A)

section 4(3)

Income-tax Act

section 12

section 2

section 2( 4A)

section 2(4A)

section 2(6A)

Income-tax Act

Income-tax Act

section 2(4A)

section 2(4A)

section 12


COMMISSIONER OF SALES TAX, GUJARAT

M/S. SABARMATI RETI UDYOG SAHAKARI MANDALI LTD.

April 26, 1976

[H, R KHANNA AND P. K. GOSWAMI, JJ.J

Sales Tax-Works contract for manufacture and supply .of kiln burnt bricks -Bricks .tnanufactured and supplied according to contract and payment received-Contract whereby land is given free and the right to sell to third parties is subject to restrictions-Whether there is a transfer of chattel for co11sideration-Co11tract whether liable to sales tax on bricks supplied-Bombay Sales Tax A.ct. 1959.

Contract of sale and contract for work and labour-Distinction--Beneficial

~.., elf are features in a contract do not negate the concept of a contract of sale.

The respondent manufactured and supplied kiln burnt bricks to the appellant as per the works contract dated 8/9th December, 1970, which provided (i) that land would be given free; (ii) that the material shall remain at the contractor's risk till the date of final delivery; and (iii) that the. contractor had a right to sell to the third parties bricks subject to payn1ent of 10% of the value of materials at the tender rates of the appellant. The respondent \Vas assessed to sales tax under the Bombay Sales Tax Act, 1959, on the basis that'" these supplies were sales. The Deputy Commissioner of Sales Tax on an application under s. 52 of the Bombay Sales Tax Act held the supplies as sales. On appeal the Sales Tax Appellate Tribunal confirmed it, following the ratio of the decision in 1964 (2) OCR p. 879 (C. B. Go, ain v.

State of Orissa and Ors.) But, the High Oourt, on a reference ans\vered it in favour of the assessee and against tb~ revenue.

Allo\ving the Revenue's appeal by special leave the Court,

l:lELD : (I) .It is well settled '..ha• whether a partiiculal' transaction is a contract of sale or a works contract depends upon the tn1e construction of the terms and conditions of the document, when there is one. The question will depend upon the intention _of the parties executing the contract. There is no standard fonnula by whichi one con di!>tinguish a contract of ::sale from the contract for vvork or labour. The question is not always easy and has always vexed jurists all over. The distinction, between contract of sale: of goods and a contract for work and Jabour is often a fine one.

A contract of sale is a contract whose main obiect is the transfer of property in and the delivery of the possession of, a chattel as a chattel to the buyer.

[160 E-G]

State of Guiarat v. Variety Body Builders, [1976]

(3) SCR 131 applied.

Halsbury's Laws of England, referred to.

(2) As per terms and conditions of contract, the land was given free lor n1anufacture of bricks: the materials remained at the risk of the contractor till the date of :final delivery; the respondent could not sell the brir; ks to third parties but could do so under certain restrictions; the contracting parties have used the words as sale, purchase, delivery or rates of supply etc., in the contract. All these terms and conditions are almost identical to the conditions in Chandra Bhan Gosain's case and hence the decision in that case will govern the present case ns well. The various other terms in the contract, nnmely,

1naintenunce o[ a qualified executive engineer for supervision of work, restriction on e1nploy1nent of children lnder 12 yers of age, lao.ur \\relfar~ provisions regnr<liing wages, workmen s con1pensat1on etc., _provLS1on relatlng to cruelty to t1nimals, non-payment of royaliy for excavating earth etc. releate to

" ;

' .

a process of proper and efficient manufacturing of bricks and are not incon- A sistent in a contract of sale. These terms do not appear to impinJe on the character of the contract as one for sale of bricks manufactured. The Government in its overall interest and anxiety could insist on compliance of certain beneficial legal measures.

Provision against sub-letting v.:hen the land was gi..-en free by the Government was also understandable. All these features do not negate the concept of a contract of sale of bricks that are ultimately manufactured. The true test in this case is whether in aking the contract. brick. produced was transferred as a chattel for consideration and this has B taken place in this case. The essence of the contract was, therefore. the delivery of the bricks after manufacturing.

[164 A-H, 165 A-D]

(3) The contra.ct in this case is contract of sale and not a works contract and the.i assest.ee is liable to sales tax.. [165E]

C. B. Gosain v. State of Orissa and Ors. [1964] (2)i SCR 879, followed.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1512 of 1971. c

Appeal by Special Leave from the Judgment and Order dated the Stl1/9th December, 1970 of the Gujarat High Court in Sales Tax

Rference No. 3/70. ·

 S. T. Desai and M. N. Shroff for he Appellant.

 · V. S. Desai, Vimal Dave and Miss Kai/ash Mehta,· for the Respaadent .

. The Judgment of the Court was delivered by

 GosWAMI, J, This is an appeal by special leave against the Judgment of the Gujarat High Court dated 8th/9th December, 1970.

The respondent (hereinafter to be described as the assessee) entered into a contract with the Public Works Department of the Government of Gujarat on September 6, 1965 for manufacture and supply of kilil-burnt bricks to the said Department for the construction of the Capital Project, Gandhinagar. Large quantities of bricks were manufactured and supplied under the contract and the applicant received payment for the same in accordance with the agreed rates. The assessee made an application under section 52 of the Bombay Sales "Tux Act, 1959, on November 19, 1967, to the Deputy Commissioner of Sales Tax, to de(ermi'ae the question whether the said supplies of bricks by the assessce to the Public Works Department were sales or works contract. The Deputy Commissioner held the supplied of bricks . by the assessee as sales. The assessee then appealed to the Tribunal against that order. The Tribunal following the ratio of the decision of this Court in Chandra Bhan Gosain v. The State of Orissa and others(') came to theo conclusion that the supplies of bricks were sales. At the instance of the assessee, the Tribu'aal referred the following question of Jaw to the High Court :- . . .

"Whether_o;,. the factS and in the circumstances of the case .the transaction envisaged by the contract entered into by the applicant with the Public Works Department of the Govern-

(!) 14 S.T.C. 766 : [1964] 2 S.C.R. 879.

16 0

SUPREME COURT REPORTS

[1976] SUPPLEMENTARY

ment of Gujarat on 6th September, 1965, for the manufacture and supply of kiln-burnt bricks to the said Department and e supply of bricks to the said Department in terms of their running Bill No. XI dated 28th October, 1967, is a sale or a works contract ?"

The High Court answered the question in favour of the assessee holding that the transaction was •a works contract. In commg to that conclusion the High Court held as follows :- . ''In our opiaion, the decision of the Supreme Court in Chandra Bhan Gosain's case (supra) is clearly distinguishable on facts. The contract in that case, though prima facie worded as regards the relevant clauses in similar fashion as the contract in the instant case, is in fact cast in a different mould

mid it would be difficult to hold in the light of the special features and characteristics of the contract with which we are concerned that the decision of the Supreme Court in that case would completely govern the facts of this case."

Mr. S. T. Desai, the learned counsel for the appellant, submits that the present case is squareli governed by the decision in Chandra Bhan Gosain's case (supra) and the High Court is wrong in holding to the contrary.

Mr. V. S. Desai, learned ccunsel appearing on belralf of the assesee, on the other hand, submits that the High Court is right in disti'nguishing the present case in view of certain distinguishing features of of the co'atract with which we are concerned.

It is well-settled that whether a particular transaction is a contract of sale or works contract depends upon the true construction of all the tenns and conditions of the document, when there is one. The question will depend upon the intention of the parties executing the contract.

As we have observed in our judgment in State of Gujarat v. Variety Budy Builders( 1) which we have just delivered there is no standard formula by which one ca11 distinguish a contract of sale from a contract for work and labour. The question is not always easy and has for all time vexed jurists all over. The distinction between a contract of sale of goods and a contract for work and labour is often a fin.e one. A contract of sale is contract whose main object is the transfer of the property in, and the delivery of the possession of, a chattel as a chattel _to the buyer. (Halsbury's Laws of England, Third Editio'a, Volume 34, pl\lle ,.. 6.)

The contract with which we are concerned in this appeal is found in a tender "for the supply of materials" containing a memorandum of the coaditions. The nature of work is described as "manufacturing and supplying kiln-burn bricks for construction of gandhinagar". The question will depend upon the true constrnction of the tender which, on acceptance, is treated here as the contract containi'ng all the terms and conditions agreed upon between the two parties. In the tender the assessee stated "I/We chairman Sabarmati Rati Udyog Soahakari Mandli -------

(1) [1976J 3 s.c.R. 131

~-

- ,

c.s.T. v. SABARMA1'1 1'iANDALI (Goswami, !.) 161

Ltd., the undersigned do hereby tender for the supply of the materials A described in the Schedule attached herewith subject to the conditions . ,_. all\lexed. The schedule described materials as bricks and also stated

"quantities to be delivered", and "rate at which to be supplied". The tender is descbed as "Supply of Materials Tender".

Although the above nomenclature, by itself, is not decisive, we find that the same i&

justified by the principal terms governing the contract to which we will B presently refer.

I r

"Clause 6 : The contractor shall give notice to the Executive

Engineer or his Assistallt of his intention of mak- ,,.. ing delivery of materials and on the materials being approved, a receipt shall be granted to him by the Executive Engineer or by his Assistant and c no materials which is not so approved shall be considered to have been delivered.

Clause 7: On the completion of the delivery of materials,

the contractor shall be furnished with a certificate to that effect, but the delivery shall not be considered to be complete until the contractor D ,1 shall have removed all rejected materials, and shall have the approved materials, stacked or • placed in such position as may be pointed out to him.

~ Clause 8 The materials to be supplied shall be of the best quality and in strict accordance with the specifi- E cation and the contractor shall receive payment

fo~ such materials only us are approved and passed by the Executive Blgineer or his Assistaot.

Should the Executive Engineer consider that any of the materials delivered arc not of the best quaJity are not in strict accordance with the specification but that they may be accepted and F made use of it shall be within bis full discretion - to accept the same at such reduced rate.s as he '

may fix thereon.

Clause 9 In the event of the material being co\1sidered by " the Officer in the charge of the work to be inferior to that described in the specifications, the con- G tractor shall on demand in writing, forthwith to remove the same at his own cost and in the event of his failure to do so, within such period as may be ilamed by lhe Executive Engineer or his

Assistant~ the said ()fjlcer may have such rejected material removed at the contractor's risk and expense, the expense so incurred being deducted H r

from any sums due or which may become due to the contractor. 1.l--333 Sup.CT/76

SUPREME COURT REPORTS [1976) SlJPPLEMENtARY

Clause 11 The contractor shall supply at his own expense all tools, plants and implements required for the due fulfilment of his contract, a!ad µie materials shall remain at his risk till the date of final delivery, except such portion as shall have been in the meantime removed for use by the Executive Engineer or his Assistant.

Cause 13 This contract shall not be sublet without the written permission of the Executive Engineer.

In the event of the contractor subletting his contract without such permission he shall be considered to have thereby committed a breach of the contract and shall forfeit his security deposit, and shall have no claim for any compensation for any loss that may accrue on accou,1t of the collection of the materials or engagements entered into.

Clause 16 No guarantee can be given that the total number of quantities of material indicated in the Schedule of the contract will be ordered during the period of the contract.

But, the Executive Engineer shall purchase from the contractor all such materials as ure detailed in the Schedule which he may require to purchase during the period of the contract.

Clau3c 17 No claim or claims made by the contractor for iacreased rates on the grounds that the market or other rates included in the contract, have risen during the period of his contract, will be recognised, that is to say, the contractor is bound to complete the wrok! and or to supply materials at F the rates mentioned in the contract.

Clause 22 All rates quoted by the contractors are inclusive of sales tax and the contractor will pay the same himself,

Clause 24 The c<Yatraetor hereby declares t!rat the articles sold to the buyer under this contract shall be of the best quality (and workmanship) and shall be strictly in accordance with the specifications and particulars contained in the Schedule and accompaniments hereof and the contractor hereby guanmtees that the said articles would continue to conf9rm to the description and quality aforesaid for the period shown in the Schedule from the date of delivery of the said articles to the purchaser and that notwithstanding that fact tlrat

I r

the purchaser may have inspected and approved the said articles if during •the aforesaid period stated in the Schedule the said articles be discovered not to conform to the descnption and quality aforesaid or !iave deteriorated alld. the decision of the purchaser in that behalf shall be final and conclusive.

The purchaser will be entitled to reject the said articles on such portion thereof as may be discovered not to conform to the said description and qtrality on such rejection the articles \j'ill be at the 'Sellers' risk and all the provisions herein contal,1ed relating to rejection of goods, etc. shall apply.

The contractor shall if so called upon to do, replace the articles etc. or such portion thereof as is rejected by the purchaser otherwise the contractor shall pay to the purchaser such damages as may arise by any of the breach of the condition herein contained, nothing herein contained shall prejudice any other right of the purchaser in that behalf under this contract or otherwise."

Amongst some of the general conditions of the contract, we find the ., following :

"Clause 3 : All the necessary arrangemeats of raw materials, equipment water, coal, labour etc. required for supply and manufacture of bricks shall have to be made by the cont, actor at his own cost. The Government shall give only land for ell; cavating soil for manufacture of bricks to the contractors free of rent from the land reserved by the

Governme, lt for this purpose. The land shall have to be !randed over back to the Government after the manufacturing of the brick work is completed.

* * *

Clause 10 The contractor shall have no right to sell these bricks, brick bats, chharas or any other materials mam1factured on this site to any other private parties.

If, however, it is found tlmt the materials have been sold by him to private parties or other bodies, he shall have to pay to Department at the rate of 10% of the value of materials at the tender rates."

While giving the specificatiol1s Item No. 1 herein refers to "manufacturing and supplying of 1 Class kim-burnt bricks of standard size including stacking in regular consignments etc. camp. as directed".

164 SCPREME cot; RT REPORTS (1976] SUPPLn1E:<TARY

A Mr. v . S. Desai bring& to our notice the conunon as well as the

distinguishr11g features of this case and of Chandra Bha11 Gosain's case

lsupra). According to him the common features arc the following:-

The land was given free for manufacture o[ bricks in both the cases.

The materials shall remain at the contractor's risk till the date of final delivery. Jn Chandra Bhan Gosain's case (supra) the contractor could not sell the bricks to third parties without previous permission of the comp:rny. Here also the contractor has no right to sell the bricks etc. but if he does sell he will have to pay 10 per cent of the value of the materials at the tender rates. Both the clauses arc, therefore, penniss1ve clauses and are substantially the same. In both the contracts the contracting parties have used the words such as sell, purch'ase, deliver or rate of supply etc. in the contract.

In Chandra Blum Gosai11's case (supra) dealing wilh those very common features this Court observed as follows :-

'It may be presumed that it was understood that in quoting his rate for the bricks, the appeJla:,1t would take intr• accowit the free supply of earth for making the bricks. Again what was supplied to the company by the appellant was not the earth which he got from it but bricks, which, we think, are something entirely different. It could not have been intended that the property in the earth would continue in the compa11y in spite of its conversion into such a different thing as bricks. Further we find that the contract provided that the bricks would remain at the appellant's risk till delivery to the company. Now, pbviously bricks could not remain at the appellant's risk unless they were his property. Another clause provided that the appellant would not be able to sell the bricks to other parties without the permission of the company. Apparently, it MIS contemplated that without such a provision the appellant could have sold the bricks to others.

Now he could not sell the bricks at all unless they belonged to him. Then we find that in the tender which the appellAnt submitted Md the ac;.ceptance of whih made the contract, he stated, "I/we hereby tender for the supply to the Hindusthan Steel Private Ltd. cl the materials described in the undermentioned memoriindurn .. The memorandum described the materials as b.ricks, and also stated the 'qual>tities to be delivered' and the 'rate at which materials are to be supplied'.

All these provisions p!Wnly show that the contract was for sale of bricks. If it were so, the property in the bricks must have been in the appellant and passed from him to the subject-matter.

From the above extract, it is clear that the decision in Chandra Bhan Gosain's case (supra) will govern the present case where terms and conditions are almost identical so far as relating to the relevant subject-matter.

' '

I '

C.S.1'. v. SABAP.MATI MA1''DALl (Goswami, /.) 165

Mr. Desai, however, took pains to point out certain distinguishing features of the present case such as maintellllllCe of qualified Executive Engineer for supervision of work subject to removal at the Instance of the Government; restriction on employme!ilt of children under 12 years; labour welfare provisions regarding wages; workmen's compellS'ation, etc.; provisions in relation to prevention of cruelty to animals; nonpayment of royalty for excavati'ag earth; use of tube-wells standing on the Government site manner of execution of the work re!(arding moulding and drying and provision against subletting which shall constitute a breach of the contract resulting In forfeiture of security deposit.

All the above tenns relate to a stage 1'.1 the process of proper and efficient manufacturing of bricks and are not inconsistent in a contract

of sale. These terms do not appear to impinge <1.1 the character of the C contract as one for sale of the bricks manufactured. The Government in its overall interest and anxiety for general welfare could insist on compliance with certain beneficial legal measures. It could also insist on certain terms which will ensure efficient production of the material.

Provision against subletting when the land was given free by Government is also understa'.1dable. All the above features do not negate the concept of a contract of sale of the bricks that are ultimately manumc- D lured. The true test in this case is whether in makinl! the contract to brick produced was transferred as a chattel for consideration alld we

ar~ clearlv of opinion that this has taken place in this case. The property in the bricks was e1.1tirely of the assessee. He had not onlv to manufacture that but also to stack them for facilitating delivery. The essence of the contract was, therefore, the delivery of the bricks after manufacture. The present case cannot be distinished from the deci- E sion of the Chandra Bhan Gosain's case (supra).

We are, therefore, clearly of opinion that the contract in this case is a contract of sale and not a works contract. The assessee is, therefore, liable to sales tax. The question is answered accordin2lv. The Hi2h Court was not right in lll!swering the question in favour of the assessee .

Te decision of the High Court is set aside. The appeal is allowed F with costs.

S.R.

Appeal allowed.

COMMISSIONER OF SALES TAX, GUJARAT

R KHANNA

P. K. GOSWAMI, JJ

s. 52

section 52

Tux Act, 1959

[1964] 2 S.C.R. 879

Clause 6

Clause 7

Clause 8

Clause 9

Clause 11

Clause 16

Clause 22

Clause 24

Clause 3

Clause 10


,._...... __ . __ .

.. D

. ,1~6

. ' f'

. ~,

UNTON OF INDIA

, I v.

PREM: KUMAR' JAIN & ORS. ETC ..

 April 28. 1976 [A. N. R; y,'. C.i., R. S. SARKARIA P. N. SHlNGlTAL

AND JASWANT SINGH JJ.l

C01wiwrion of India A rtld~ 312--A/1 l11dia Sen• ice Act, 1951-IYhnlter Union . Turitoriu ar~ 'State•.<' for.. thr pmposc of.

A new. c.odre of the ln<iinn Administrntiv.: Scrvic.: w:t• con<titute<l for Dtlhi . nod. Himachnl Pra<le, h, and recruitment to it was made dirtctlv without followinl! the normal method prc.<crihcd by Rule 4( I) of the J.A.S. !Recruit- . m<llt) Rule•. 1954.

These Rule' were nmendc<.l, to provide for n ioint c3<1re for the Union Territories and the North East Frontier Agcncv. and the Central GO\-eroment formul:ttecl a scheme for extcndinl': the Ddhi-Himachal Pradesh Cadre to all the Union Territories bl( 'lb<orbin!! its officers an.l nr>PQintin~ of]'icers from. the Todian Frontier Adrnii, trative Service and all other Union Territorie• initiallv. The ioint cndre wn~ brouht into e xistence bv the Central Government's onier4 notified under S.:e. 3 (I ) of the T.A.S. (Cadre) l!ul<5.

1954, !'Uhlished in the G; w.:ue of India, F.traordinary. The creation of tiK new joint cadre nnJ th~ anpointmcnt of. some of the respondents threto. were chnllcnged in. the llit•h Court on the cround that they were contrary to Art. 312 of the Con"itution nnLI the All India Services Act. 1951. as the joint carlrc \\'a.S not common to the Union nnd the States inasmuch as a.

Union Territory Wft5 not a Stnte, nnd the recruitment of the resoondent• concerned, Wi!Jl illeal. The Hich Court quash•<.! the Central Gover11mcnt's ordu< and the scheme for the formation of a ioint cadre of the J.A.S. nr.d

h~J , J lhat !h•.=atic>n of. the Delhi H imachal Pra.te,; h Cadre was al-; o ultra virci lhc Con, lttutJOn.' t..., stlon of law which came up before thi.• cOurt "':\.' weth:r _1Jnton Terntor.,, aro 'Stole~' for tho purpose of Art. 311 of &e Con, lilut•un. llnd lhc all Jndia Service Rule•. 195 L 7

}, llowing the apf>el• the Cottrt, ·

I' Hf'f.O: Section 3~58) of the cneral ChHJSCS Act. 1897, provid., inter

•.~1 • lhnt. tbe expresstn 'Stale' shall me; m ~:1 state spccifid in th• fir<;, ~.hed!tle . to. t.he. Con•t•rutlon nnd hall include. n U nion Terirtorv. nv VIrtU~ or Arttcl.- 372-A or th-.

Constitution. which wa~ inel\ed bv tM Co•~•tltutton tS.:vnth Amendmcn\) Ac 1956 becou<e of the fact that th~ ne.r. of ndaJ>t.hon un<lr nrticle 372'(2) h:W con•o to ntl ~"'1. it -..·:~~ thJt c lllttln of the exnre..,.ion 'Stull'' which haJ eiTect frorn th~ t st <lav of h ovem e.r. 195~. Vld Inc C'on<tltution expresly orovidcd th,1t it caul.! not

e. que<tloned '" unv COull of btw.

T• Wll$ a ·c!al nrovi•ion \\'nkh \\111 . me, Jnt (0 '<fVl' fhr (lllr11i>'e (

I.' L I bl~ Artide 37' A 1 " ma•mP t., e s.-,••nth Arncn.!m••nt Al '""•l analc>r•nn• in ~~u,:; v<' n ~<''h wr rn th .. Pr.-<id••nt which ""'< ual ";~' th• Pr"'iJrnt th•rdor er 11" er nrllcll 37212\.

A• from Novrmt..•r I. 19. hrineinJ: tne provj<lo~. h.tt the flOV.('l : (O nd:, nJ th• bw~ ror tho• nttre of l"rovi, fon• of thl' Con<li~ t' ony law '" force in ln<lia in ~, c•"'l' <'tth. th~ i•urd the Adurl'ltion of l' ron. ~I ,..,,, lln•lrr !hat powr thnt th<" Pr.stJ(O dnu!lt' (~R) In .::ctinn 3 0~h ( G 0 • I 1 O"l'f. 1911i, whi<"h uh<ritnt., l thr nt~• 'f1,,. llih Court W<'nl wr ": .trnrat Clause• Act. 1 ~97. ,...r"rr"l "' ahrW i "llnion Tc-rritori-""'1" w on~ \~ ttku., t! " rnhtrarv vi.-w nnft irt hll1dio~ chr~ ere 0 " 1 Stut~ (l6Mf';, 169.\G. 1710!

"'''"'If'~"""'"' nf A I 1 fl'l70J 3 S r R ·~1 'r:r"''u, 11' 11'""ct Co. Ltd. v . . %ri Gmudaui!l ~- ()rr .• · • "" • 1 .:rreu tn.

oft~~~~.'- Ar>PrtLATP. JURI'mtcno~: Civil Appeals Nos. 218~~~99

.~· (From the iudl!mc t 1 d D !hi Hil'h Court in Writ p ~} 0 ( ~~ et dated the 25-9-1969 of tbll c ' e 1 100~ 1{o~. <405 nncl 4 7R to 487 of 1 961!) •

-r--

I .-

UNION v, P. K. JAIN (Shinghal, !.) 167

V. P. Rama11, Addl. Sol. General with P. P. Rao, and S. P. Nayar, A for the appeUant.

R. B. Datar, for the respondents.

The Judgment of the Court was delivered by

SHINGHAL, J.

These appeals by certificate are directed against the B judgment of the Delhi High Court dated September 25, 1969, allowing Civil Writ Petition No. 405 of 1968 and connected petitions Nos. 478 to 487 of 1968.

The High Court has quashed the orders of the Central Government notified in GSR 42 to 49, published in Gazette of India, Extraordinary, dated January 13, 1968, as well as the scheme for the formation of a joint cadre of the Indian Administrative Service, hereinafter referred to as the Service, for the Union Territories, and C has held that the formation of the Delhi-Himachal cadre of the Service was also ultra vires the Constitution.

As we shall show, the decision has turned on a short point of law, and it will be enough to refer to those facts which bear on it.

A new cadre of the Service was constituted for the Union Territories of Delhi and Himachal Pradesh, and recruitment to that cadre was made directly without complying with the requirement of rule 4 ( 1) of the Indian Administrative Service (Recruitment) Rules, 1954, hereinafter referred to as the Recruitment Rules, which prescribed the normal method of recruitment to the Service.

The Rules were amended (\n December 21, 1967, by providing for a Joint Cadre in relation to the Union Territories and the North East Frontier Agency, and the Central Government formulated the aforesaid scheme to extend the Delhi-Himachal Pradesh Cadre to all Union Territories by absorbing the officers of that cadre and by appointing to it officers of the Indian Frontier Administrative Service and all other Union Territories at its initial constitution. The Joint Cadre for all the Union Territories was hrought into existence from January 1, 1968, by GSR 42 under rule 3 (1) of the Indian Administrative Service (Cadre) Rules, 1954, hereinafter referred to as the Cadre Rules, published (along with certain consequential changes in the other rules of the Service) in Gazette of India, Extraordinary, dated January 13, 1968.

The petitioners in the High Court challenged the creation of the new Joint Cadre for all the Union Territories, and the appointment of some of the respondents thereto.

It was urged in the High Court that the constitution of the new Joint Cadre was illegal as it was contrary to the provisions of article 312 of the Constitution and the All India Services Act, 1951. as it was not common to the Union and the State inasmuch as a Union Territory was not a State. and the recruitment of the respondents concerned to the Joint Cadre was contrary to the provisions of section 3 of the AU India Services Act, 1951, and the Cadre Rules.

The High Court examined the question whether the Union Territo n ries were States, and reached the conclusion that this was not so. It therefore held that rule 4(5) of the Recruitment Rules was ultra vires the Constituion n~ the All Tnc_ti~ Services Act, fo~ the Cadre in ques~

SUPREME COURT REPORTS

(1976) SUPPLEMENTARY

ti?n could not be said to be common to the Union and the States.

The High Court also observed that as the Central Government was itself the State Government for purposes of a Union Territory, the Central Governmen~ could. not consult itself within the meaning of section 3 of the All Ind1a SerVlces Act and the Recruitment and the Cadre Rules.

It therefore quashed the orders and the scheme mentioned above.

. It appears, ho:vever, that it was not brought to the notice of the H1gh Court that, m so far as the Service was concerned, it was not necessary for Parliament to make a Jaw providing for its creation as a service common t? t~ Union and the States, under clause (1) of article 312 ?f the Constttutmn, because clause (2) of that article expressly provtded as follows,-

C "312. (2) The services known at the commencement of this Constitution as the Indian Administrative Service and the Indian Police Service shall be deemed to be services created by Parliament under this article."

The Service did not therefore have to be create-d under the provisions of clause ( 1} of article 312 of the Constitution, or section 2A of the All India Services Act. Section 3 ( 1) of that Act however made prcr vision for the making of rules for the regulation of recruitment and conditions of service of persons appointed to an All-India Service "after consultation with the Governments of the States concerned." It was under that provision that the Cadre Rules were made by the Central Government, and the question which engaged the attention of the High Court was whether the Union Territories could be said to be States for purposes of such consultation.

In that connection the High Court examined the question whether the Union Territories could be said to be States merely because rule 2(c) f the Cadre Rules defined a uState" to mean a State specified in the First Schedule to the Constitution and including a Union Territory, and answered it in the native.

The expression ''State" has not been defined in the Constitution, but it has been defined as follows in section 3 (58) of the General Clauses Act (Act X of 1897) ,-

ustate"-

(a) as respects any period before the commencement of the Constitution (Seventh Amendment) Act, 1956, shall mean a Part A State, a Part B State or n Part C State; and

(b) as respects any period after such commencement, shall mean a State specified in the First Schedule to the Constitution and shall include n Union Territory.'' This was however not the original definition, for it wa<> substituted by the Adaptation of Laws (No. 1) Order, 1956. Before that Order, the expression "State" meant ''a Part A State, a Part B tate or a Part C State!' That definition was, in its turn, brought in by adaptation under article 372 of the Constitution by the Adaptation of Law!! Order, 1950, for the purpose of bringing the provisions of any law in force in

--..

.. '

}- .

) .,

U~IOJ\ , ., P. K. JAIN (5MnilWI, f.) lGO

the territory of India in accord with the provisions of the Constitution.

The original definition has thus been adapted twice to suit the require~ ments of the Constitution.

Clause ( 1) of anicle 367, which deals with "interpretation'' of the Constitution, provides as follows,-

"367(1) Unless the context otherwise requires, the Gene~ ral Clauses Act, 1897, shall, subject to any adaptations and modifications that may be made therein under article 372 apply for the interpretation of this Constitution as it applies for the interpretation of an Act of the Legislature of tht

Dominion of India."

A crossreference to article 372(2) shows that while the purpose of the adaptation was to bring the provisions of any law in force in the country "into accord with" the provisions of the Constitution, clause

(3) thereof expressly stated, inter alia, as follows,-

"(3) Nothing in clause (2) shall be deemed-

( a) to empower the President to make any adaptation or modification of any law after the expiration of three years from the commencement of this Constitution;"

; "'" The power of adaptation or modification was therefore spent after the expiry of three years, and the High Court has taken the view that as it were only the adaptations made in the General Clauses Act under article 372(2) which applied to the interpretation of the Constitution in view of article 367 (1). the adaptations made later, by article 372A, were not so applicable.

A comparison of the provisions of articles 372 and 372A shows, however, that while the purpose of both the articles was to bring the provisions of any law in force in India "into accord" with the provi~ sions of the Constitution, article 3 72 was a general provision enabling the making of adaptations.and modifications in such laws by an order of the President. whereas article 372A was a special provision which

was made specifically for purposes of the Constitution (Seventh Amendment) Act. 1956. inasmuch as clause ( 1) thereof provided as

follows.-·-·

"37'2/\ (l) For the purposes of bringiog the. provisions of any law in force in India or in nny part thereof, immc~ diately before the commencement of the Constitution

(Seventh Amendment) Act, 1956, into accord with the pr~ visions of this Constitution as amended by {hat Act, the President may by order made before the 1st day of November, 1957, make such adaptations and modifications of the law, whether by way of repeal or amendment, 'fls may be necessary or expedient, and provide that the law shall, a.s from such <; late as may be specified te order, have effect subject to . '

170 SUl'REM.E COURT ~El'OKIS LEJ76j SUl'PLEMBNTARY

the adaptations and modifications so made, and any such actaptatwn or modification shall not be questioned w any court of law" (Emphasis added)

It is obvious therefore that as the power of the President to make any adaptation or moomcauon of any 1aw under clause (2J of article 3N.

was spent atter three years, .Parliament telt the necessity ot grving such a power to the Pres1oent once again for the purpose ot bnnging the provisiOns ot any law m force Immedrately before tht;; commencement of the Constituuon (Seventh Amendment) Act, 1956, into accord wrth tl1e provisions ot the ConstitutiOn as amended by that Act.

That was theretore a necessary power as it was meant to make the amended Constttutwn workable. .t-or instance, sectron 3 (58) of the General Clauses Act, 1 'l597, as it stood before the coming into force of the Seventh Amendment Act, defined a "State" to mean ·•a Part A State,

a P-art B State or a Part C State." As has been stated, that definition had Itself been substituted by the Adaptation of Laws Order, 1950, to make it workable, and it served the purpose, for the country had those three types of States at that time.

But an important change was made by the Constitution (Seventh Amendment) Act, 1956, which abolished the distinction of Part A, Part B and Part C states and provided, inter alia, that the territory of the country shall comprise the territories of the States and the Union Territories specified in the First Schedule.

The definition of the expression "State" as it stood before November 1, 1956, became unsuitable and misleading on the coming into force of the Constitution (Seventh Ame.ndment) Act, 1956, from November 1, J 956, and it will, for obvious reasons, be futile to contend that it should have continued to be applicable for all time to come and remained "the final definition of "State" " merely because the period of three years provided by clause (3) (a) of article 372 of the _Constitution expired and was not extended by an amendment of that clause, or because article 367 (I) was not amended by the Seventh Amendment Act "to say that adaptations made in the General Clauses Act otherwise than those made under article 372(2) would be applicable to the interpretation of the Constitution." The High Court also erred in thinking that such "abstention seems to be deliberate." On the other hand, it is quite clear from the fact that Parliament inserted article 372A by the Constitution (Seventh Amendment) Act, 1956, that . it was aware that the power of adaption under article 372(2) had come to an end, and was alive to the necessity of giving a similar power of adapting_ the laws once again to the President for the purposes of bringing the provisions of any law in force in the country immediately before the commencement of that Act "into accord" with the provisions of the Constitution, It is therefore futile to contend that the definition of the expression "State" which was applicable upto November 1, 1956, remained the final definition for all time to come.

That view is incorrect, for it overlooks or ignores the anxiety of the Parliament to remove any such misapprehension by inserting article 372A. It was a special provision, and it was meant to serve the purpose of making tl1e Seventh Amendment Act workab!e.

As has been held by this Court inManagement of Advance Insurance Co. Ltd. v, Shri Gurudas-

... 1

UNION V. P. K. JAIN (Shinghal, J.) 171

mal and others(1), article 372A gave a fresh power to the President )-- which was equal and analogous to the power under article 372(2).

It follows therefore that, as and from November 1, 1956, when the Constitution (Seventh Amendment) Act, 1956, came into torce, the President had the power to adapt the laws for the purpose of bring- ; ,. ing the provisions of any law in force in India into accord with the provisions of the Constitution. It was under that power that the President issued the Adaptation of Laws (No_ lf Order, 1956, which, as has been shown, substituted a new clause (58) in section 3 of the General Clauses Act providing, inter alla, that the expression "State"

shall, as respects any period after the commencement of the Constitution (Seventh Amendment) Act, 1956, mean "a State specified in the First Schedule to the Constitution and shall include a Union Territory." It cannot be said with any justification that there was anything repugnant in the subject or context to make that definition inapplicable.

Bv virtue of article 372A(l) of the Constitution, it was that definition of the expression "State" which had effect from the 1st day of November, 1956, and the Constitution expressly provided that it could "not be questioned in any court of law." The High Court therefore went wrong in taking a contrary view and in holding that "Union Territories are not 'States' for purposes of Article 312(1)" of the Constitution and the preamble to the Act of 1951." That was why the -High Court erred in holdinf!; that the definition of "State" in the Cadre Rules was

;.ultra vires the AU India Services Act, 1951 and the Constitution, and that the Union Territories Cadre of the Service was "not common to the Union and the States" within the meaning of article 312(1) of the Constitution, and that the Central Government could not make the Indian Administrative Service (Cadre) Rules, 1954 in consultation with the State Governments as there were no such governments in the

Union Territories.

The High Court has held further that section 3 of the All India Services Act, 1951 and rule 5 of the Cadre Rules have been contravened bv the "direct appointment of respondents 2 to 37 to the Union Territories Cadre and by their being not recruited first to the IAS." But no such ground appears to h, ave been taken in the writ petition.

Moreover, the validity or rule 4(5) of the Rcruitriient Rules, which ,..- rontained a TWn-nbstrmte clause providing for recruitment to t11e Joint • Cadre of the Union Territories on its initial constitution by such method

~1.f: the Central Government may, after consultation with the Union Pnblic Service Commission prescribe was not examined by the Hhrh Court. · ~-· - -- - ,.

For the reasons mentioned above. the appeals are allowed. the impuQ"ned judgment of the Hih Court datect September 25, 1969 is Ret aside and the writ petitions are dismissed.

There will however be no orders as to tl)e costs.

M.R Appeals allowed,

(t) (1970] 3 S.C.R. 881.

UNTON OF INDIA

PREM: KUMAR' JAIN & ORS. ETC

R. S. SARKARIA

JASWANT SINGH JJ

Art. 312

LI the All India Services Act

Art. 311

Jndia Service Rule

Section 3

article 312

section 3

AU India Services Act, 1951

section 3

article 312

article 312

section 2A

Section 3

First Schedule

section 3

General Clauses Act

First Schedule

article 372

Clauses Act, 1897

article 372

article 372(2)

General Clauses Act

article 372(2)

article 367

article 372A

articles 372 and 372A

article 3

article 372A

article 3N

General Clauses Act

First Schedule

article 372

article 367

General Clauses Act

article 372(2)

article 372A

article 372(2)

article 372A

Seventh Amendment Act

article 372A

article 372(2)

section 3

General Clauses Act

First Schedule

article 372A(l)

Article 312(1)

AU India Services Act, 1951

article 312(1)

section 3

All India Services Act, 1951

(1970] 3 S.C.R. 881