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STATE OF UTTAR PRADESH

ATAMOHD.

May 8, 1980

[S. MURTAZA 'FAZAL ALI AND P. S. KAILASAM, JJ.)

flttar Pradesh Municipalities Act, Sections 2(23) 7, 116 (g) a11d 118- Scope of.

Tho respondent applied in the year 1939, to the Municipal Board, Gorakhpur for granting to him of a lease of plot No. 227 measuring 45'X20' adjoining Patri along with the road running from Golgarh to Alinagar in Gorakhpur.

The Board declined to grant him the lease. On a second application dat~ 10-10-1945, the Municipal Board passed a resolution on 24-11-1945 granting the lease to the respondent. On 8-3-1S46 the District Magistrate accorded his approval of the resolution of the Mnnicipality. On 12-4-1946 the respondent executed a "KABULIY Al"' in favour of the Municipal Board, Gorakhpur. On 23;4-1946 the respondent applied for permission to construct a house and submitted a plan for sanction. The plan was sanctioned by thei Municipality oiii 8-5-1946.

On receipt of certain representations on 10-6-1947, the District Magistrate directed the Chairman of the Municipal Board not to allow the construction till a decision was taken on the question. On 13-6-1947, the Chairman, Municipal

Board directed the respondent not to proceed with the construction of the house, E The State Government on being satisfied that the resolution regarding the grant

of the lease was not within the competence of the Municipality, directed the Commissioner to cancel the lease granted to the respondent, whereupon the res--

pendent was served with a notice on 13-7-1948 cancelliog the lease and calling upon him to remove the construction and deliver vacant possession within 15 daya of the receipt of the notice.

The respondent filed a suit no. 86 of 1948 for an injnnction restraining the Municipal Board from demolishing or otherwise F interfering with the Construction made by him on the disputed land. The Civil Judge, GQrakhpur decreed the suit and that has become final.

Thereafter, claiming the land as the Nazarul land belonging to the State, the appellant-State filed 5uit no. 109 of i949 in the Court of Civil Judge, Gorakhpur against the re5pondent Ata Mohd. for a mandatory injunction directing the respondent to remove his material and construction and for a decree for G possession over the land measuring 45'X20'. The Civil Judge Gorakhpur dismi55ed the suit by judgment and decree dated 3-10-1950. The appellants plain tiff preferred first appeal No. 27 of 1951 to the High Court of Allahabad. The appeal woo heard by a Bench of two Judges but on a difference of opinion, the matter was referred to the third Judge. In accordance with the view of the majority, the appeal preferred by the appellant plaintiff was dismissed by its

judgment dated 25th August, 1965. On a certificate granted by the High Court H under Art. 135 of the Constitution and also Art. 133(1)(c) of the Constitution, the present appeal in this Court was filed by the plaintiff /appellant.

A Allowing the appeal, the Court

HELD : l. The Municipalities in various States were created undel' the res pective Municipalities Acts in order to facilitate the efficient administration of the Municipal areas and to provide lighting, watering and maintaining of publid streets a.nd places. The duties of the Municipal Boards are specified in S. 6 of the U.P. Municipalities Act. Under S. 118 of the Act, the Municipal Boiird is e'mpowered to manage or control any property entrusted to its management and control. The vesting of the property, in the Municipality is under S. 116 of the Act. S. 116 provides that subject to auy special reserv:>tion made by the State Government, all property of the nature specified in this section and situated within the Municipality shall vest in and belong to the Board, and shalli, with all property which may become vested in the Board, be under its direction, management and control. While under clause (f) of S. 116, all lands and other property transferred to the Board by the Government by gift, purchase or otherwise for local public purposes ves! in the Municipality, under Cl. (g), the streets vest only qua streets and not as absolute property with the Municipality.

In the present case the property falls within the definition of 'Streee wider section 2(23) of the Act. [1100 A-D, E-F, HJ

2. Though , the street vested in the Mnnicipal Council under section 116 of the U.P. Municipa.l Act, it does no~ transfer to the Municipality the right of the owner in the site or. soil over which the street exists. Therefore, when! a Street ceases to be a highway by its being diverted to some other use, the inrerest of the Corporate body deten, nines. Therefore, what isvested in the municipality under sectioo 116(g) is the street qua street and if the Municipality put the street to any other nser than that for which it was intended, the State as its Own.er, is entitled to intervene and mafntain an action and to get any persrin in, illegal occupation evicted.

[1102 A, G, 1103 A-BJ -

Municipal Board, Mangalur v. Sri Mahadeoji Maharaj, [1965] S.C.R. 242; followed.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1513 of 1970.

Appeal by Certificate from the Judgment and decree dated 25th August, 1965 passed by the Allahabad High Court in first Appeal No. 27 of 1951.

G. N. Dikshit and S. Markandeya for the Appellant.

Y ogeshwar Prasad, Mr. & Mrs. S. K. Bagga & Mrs. Rimi Chhabra G for Respondent

The Judgment of the Court was delivered by

KAILASAM, J.-This appeal is preferred by the State of Uttiir Pradesh by certificate granted by the High Court of Judicature at Allahabad on 18-5-1970 in Supreme Court Appeal No. 105 of 1966 H against its judgment and decree dated 25th August, 1965 passed by it in first appeal No. 27 of 1951 dismissing the suit filed by the State of Uttar Pradesh.

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u.P. STATE v. ATA MOHD (Kaiiasam, J.) 1097

The State of Uttar Pradesh filed suit No. 109 of 1949 in the Court A of Civil Judge. Gorakhpur against the respondent Ata Mohd. for a mandatory injunction directing the respondent to remove his material and construction and to clear the land and the plot No. 227 in Mohalla Purdilpur in the City of Gorakhpur and for a decree for possession over the land measuring 45'. X 20'. The Civil Judge, Gorakhpur dismissed the suit by judgment and decree dated 3-10-1950. The plain- R tiff preferred first appeal No. 27 of 1951 to the lfrgh Coun of Allahabad. The appeal was heard by a Bench of two Judges but on a difference of opinion, the matter was referred to the third Judge. In aecordauce with the view of the majority, the appeal preferred by the plaintiff was dismissed by its Judgment dated 25th August,

J 965.

On a certificate granted by the High' Court under Art. 135 of the Cons- C titution and also Art. 133 ( 1 )( c) of the Constitution, the present appeal in this Conn was filed by the plaintiff/appellant.

The facts of the case are briefly as follows : The plot in dispute is plot No. 227 measuring 45' x 20' adjoiniog Patri alongwith the road running from Golgarh to Alina gar in Gorakhpur. The respon- D dent Ata Mohd applied to the Municipal Board, Gorakhpur for grant to him oi a lease in the year 1939. The Board dedined to grant him lease. The respondent again applied on 10-10-1945. The Municipal Board passed a resolution on 24-11-1945 granting to the respondent the lease and forwarded the resolution to the District Magistrate to accord his appi; oval who on 8-3-1946 approved the resolution of the E Municipality.

On 12-4-1946, the respondent executed a 'KABULI- YAT' in favour of the Municipal Board, Gorakhpur. On 23rd April, 1946, the respondent applied for permission to construct a house and .submitted a plan for sanction.

The plan was sanctioned by the Municipality on 8th May, 1946. F On receipt of certain representations on 10-6-1')47, the District Magistrate directed the Chairman of the Municipal Board not to allow the construction till a decision was taken on the question. On 13-6- 1947, the Chairman Municipal Board directed the respondent not to proceed with the construction of the house. The State Government on being satisfied that the resolution regardirig the grant of the the lease was not within the competence of the Municipality, directed the Commissioner to cancel the lease granted in favour of the respondent.

The Executive Officer, Municipal Board, issued a notice on 13-7-1948 to the respondent cancelli'llg the lease and called upon him to remove the construction and deliver vacant possession within l 5 days of the receipt of the notice.

The respondent filed a suit No. 86 of 1948 for. an injunction restraining the Municipal Board from demolishing _1

11-610SCI/80

or otherwise interfering with the construction. made by him on the disputed land. The Civil Judge, Gorakhpur, decreed the suit as prayed fot. The present suit out of which this appeal arises was filed by the State of Uttar Pradesh subsequently in 1949.

In the plaint the State of U. P. submitted that plot No. 227 is Nazrul land and is the property of the Government. It described the

disputed land as adjoining the Patri of the Munibpal Board running from Golgarh crossing to Alinagar and situated beyond the limits of the road and Patri.

Acoording to the Government, the Municipal Board witho\lt knowing the true position of the land passed the resolution on 24-11-1945 to lease the portion of the land in favour of the defendant.

In paragraph 10 of the plaint the State of U.P. alleged that the Government or the Distri>et Magistrate were not originally aware of the land being Nazrul r and of its being dealt with by the Municipal Board in an objectionable manner and that the Municipal Board was under the wrong impression and that on realising the true state of affairs on instructions of the Government, the Municipal Board served a notice cancelling the resolution of the Municipality to lease the land to the respondent.

The Government submitted that it was entitled to retain its possession on the ground (1) that it never leased

on( the land to defendant nor did the defendant make the construction with the plaintiff's permission; (2) that the Municipal Board is not the owner of the land and has no interest in it and the Municipal Board did not, in fact, execute any lease in favour of the defendant and that neither the resolution of the Municipality nor the 'KABULIY AT' executed by the defendant would confer any right on the respondent, the respondent in his written statement admitted that the land ig dispute formed part of the Patri of the public road running from Golgarh to Allnagar in the City of Gorakhpnr. He pleaded tha~ there was a. practice in the Municipal Board, Gorakhpur not to execute a leasei but to obtain . KABULIYATS"from lessees and that he bona fide believed the Mm:iicipal Board is the owner of the plot and asked for permission and acting on the permission granted, put up a double storey house costing more than ten thousand rupees.

He further contended that even assuming though without admitting that the land in dispute belonged to plainhtt Government, the Municipal Board is fully authorised to let out such a land, to him.

He further submitted that as the Collector of Gorakhpur has authorised the lease of the land by the Munidpality and sanctioned the grant of the lease to the respondent, the Government is not entitled to' eject him.

From the pleadings, it is clear that the disputed land adjoins Patri of the ronJ running from Golgarh to Alinagar. It is also admitted

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that the Municipality did not ex.ecute the lease but the respondent executed a 'KABULIYA T' regarding the land. the contention on behalf of the plaintiff State of Uttar Pradesh is that the land belonged to the State and the Municipality had no power to lease ilie land.

The Trial Court found that the land in dispute does not belong to the plaintiff Government but was a "street" and belonged to the Municipal Board, Gorakhpur. It also found that though no lease deed was executed by the Municipality as the defendant took po"ession under the contract and admittedly built up a house, the plai'Iltiff is estopped from prayi.ng for demolition and for possession of the building.

On appeal, the High Court accepted the findings of the Trial Cour( that the disputed land is adjoining Patri but as two Judges took the view that land in dispute vested in the Municipality under s. 116

(g) of the Uttar Pradesh Municipal Act, it was the only competent j authority to sanction the lease in respect of the land and the State

Government had no right or interest left in the land and could not, therefore, challenge the validity of the transaction entered into by the Board in exercise of the power conferred under the Municipalities Act.

As a result 'of the finding that the State had no right to the property, it was held that the Government was not entitled to challenge the lease granted by the Municipal Board.

In this view, the appeal preferred by the State was dismissed."

It may be noted that the suit filed by the respondent ag, tinst the municipality for injunction restraining the Municipal Board from demolishing or interfering with the constructions made by him was

decreed in O.S. No: 86/1948 and that decree has become final.

In the present suit, the municipality is not a party. Therefore, the contention that the municipality had not leased the site to the respondent by a document as required by Municipal Act, would be of no avail.

Equally, the plea that it acted beyond the scope of its [!Uthority, is not available to the municipa'lity. The plea of the State taken before the High Court, and before us, by Mr. Dixit learned counsel for the appellant, is that the State is the owner of the property inspite of the fact it had vested in the municipality as a "street" under S. l l 6(g) of the Act. It was submitted that. when the property is put to a different use, it is open to the Government to assert its title and require anyone in illegal possession of the property to vacate.

There is not much dispute that the property belonged to the State before the Muni, cipal Act was passed.

The High Court has found that the Sfate was the owner of the property till the Municipal Act was passed and this futding was not challenged before us.

The only point on which the State lost the suit before the High Court was that aftr the passing

' A of the Uttar Pradesh Municipal Act, the property vested in the Municipality and th.e State ceased , to be the owner and, therefore, cannot maintain tbe suit for evicting tbe respondent

The Municipalities in various States were created under the respective Municipalities Acts, in order to facilitate the efficient administration of the Municipal areas and to provide lighting, waterihg and

maintaining of public streets and places. The• duties of the Municipal Boards are specified in S.7 of the U. P. Municipalities Act.

Under S. 118 of the Act, the Municipal Board is empowered to manage or control any property entrusted to its management and control. The vesting of the property, in the Municipality is under S. 116 of the Act. S. 116 provides that subject to any special reservation made by the Stak Government, all property of the nature specified in this section and situated within the Municipality shall vest in iind belong to the Board, and shall, with all property which may become vested in the Board, be under its direction, management and control.

Cl.(g) relates to vesting of streets and is as follows :-

"All public streets and the pavements, stones and other materials thereof, and also all trees erections, matenal9 implements and things existing or on appertaining to such streets".

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It may be noted that while under cl.(f) of S-116 all lands and otbec ---( property trnnsferred to the board by the Government by gift, purcha'e

or otherwise for local public purposes vest in tbe Municipality, under

cl. (g), the streets vest only qua streets, and not as absolute property with the Municipality. The word 'street' is defined under S.2 (23) as F follows:-

Street means any road, bridge, footway, lane square, cpurt, alley or passage which .tbe poblic or any portion of the public, has right to pass along, and includes, on eitber. side,

' the drains or gutters and the land upto the defined boundary of any abutting property, notwithstanding the projection over such land of any verandah or other superstructure".

It has been found that the property in dispute is Patri and is a land which is within tbe defined boundary of the property abutting into the road. Thus the property in question falls within the H definition of the word 'street'. The question as to the nature of the right that vest in the Municipality under S. 116(g) of the Uttar Pradesh Municipalities Act will have to be considered. This Court in Municipal

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Board.

Ma11galur v. Sri Mahndeoji Maharaj('), had to consider the. nature of the right that vested in the Municipality over the streets, Sll.bba Rao, J. (as he then was) after considering the decisions of the Ellglis!1 Courts and the High Courts, summed up the law on this subject as follows :- •

The inference that the side lands are also included in the public way is drawn easil; y as. the said lands are between the metal road and the drains admittedly maintained by the Municipal Board. Such a public pathway vests in the municipality, but the Municipality does not own the soil. It has the exclusive right to manage and control the surface of the soil and 'so mucil of the S'Oil below and of the space above the surface as is necessary to enable it to adequately maintain the street as a street It has also a certain property in the soil of the street which would enable it as owner to bring a possessory action against trespassers. Subject to the rights of the Municipality and the public to pass and repass on tbe highway, the owner of the soil i!l general remains the occupier of it and, therefore, he can maintain an action for trespass against any member of the public who acts in excess of his rights."

After referring to S.116(g) of the Uttar Pradesh Municipalities Act, under which a public street vests in a Municipality, the learned Judge referred to a decision of a Division Bench of the Madras High Court in S. Sundaram Ayyar v. The Municipal Council of Madura and the Secretary of State for India in Council(') where the scope of the vesting under the Madras District Municipalitie~ Act was dealt with.

The learned Judge extracted the head note from the Madras decision observing that it brought out the gist of the decision. The bead note runs as follows:-

"When a street is vested in a Municipal Council, such vesting does not transfer to the Municipal authority the rights of the owner in the site or soil over which the street exists.

It does not own the soil from the centre of the earth Wlque ad caelum, but it has the exclusive right to manage a!1d

control the surface of the soil and so much of the soil below and of the space above the surface as is necessary to enable it to adequataly maintain the street as a street. It has also a certain property in the soil of the street which would enable it as owner to bring a possessory action against trespassers."

i l I [!965] 2 S. C. R. 242. 111 [1902] I. L. R. 25 Mad. 635.

The view taken by the Division Bench of the Madras High Court was that though the street vested in the Municipal Council, it does not transfer to the Municipality the rights of the owner in the site or soil over which the street exists. The question has been dealt with at some detail in the Madras decision and as it has been approved by this Court, it may be usefully referred to.

The High Court while obsetving that if the land itself had been acquired by the Municipality, either by purchase or otherwise and roads and drains formecl thereon, the Municipality would have been the owner of the land but if the street or highway over the land was dedicated to the public either by the State or by the owners of the land adjoining the highW'<1y will continue vested, subject only to the burden of the highway, in 'the State or the respective owners of the land on. either side of the highway ad medium filum, or in any other person who may have dedicated the street to the public as the case may be. The Court after pointing out that the Madras Municipal Act was a modelled after the English Metropolis Local Management Act, 1855 referred to the Englisll cases which dealt with the vesting of the street in the Municipality in1 observed :

"The conclusion to be drawn from the English case law is that what i~ vested in urban authorities under statutes , similar to the District Municipalities Act, is not the land over which the street is fonned, but the street qua street and that the property in the street thus vested in a Municipal Couucil is not general property or a species of property known to the Common Law, but a special property created by statute and vested in a corporate body for public purposes, that such property as it has in the street continues only so long as the street is a highway by being excluded by notification of Government under section 23 of Act IV of 1884 or by being legally stopped up or diverted, or by the operation of the law of limitation (assuming that by such operation the highway can be extinguished), the interest of the corporate body determines." It is, therefore, clear that when a street ceases to be a highway by its being diverted to some other use, the interest of the corporate body determiµcs.

After referring to the decisions of the Hi>gh Courts in India, it expressed its concurrence with the decisions in Chairrr.an of the Naihati Municipality v. Kishori Lal Goswami('), Madhu Sudhun Kunda v. Pramode Nath Roy(') and Nihal Chand v.

Azmat A Ii Khan(") and concluded that the nature or the right that vested in the

(I) !LR 13 Cal .. 171

< 2) !LR 20 Cd. 632 \.l) !LR 7 All. 362

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U.P. STATE v. ATA MOHD (Kai/asam, J.) 11 o3

Municipality as regards public streets thyre is no disposal by the Indian A Legislature of any land or hereditament vested in the Government. What is vested in the Municipality under S. 116(g) is the street qua street and if the Municipality put the street to any other user than that for which it was intended, the State as its owner, is entitled to intervene and maintain an action and to get any person in illegal occupation evicted .

We accept the contention of Mr. Dixit, learned counsel for the State of R' U .P. that the State is the owner and in the circumstances of the case entitled to maintain action for eviction of the respondent.

The view taken by the High Court is erroneous. The result is that the appeal by the State is allowed with costs and there will be decree in favour of the plaintiff as prayed for.

S.R.

Appeal allowed.

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STATE OF UTTAR PRADESH

ATAMOHD.

May 8, 1980

S. MURTAZA 'FAZAL ALI

P. S. KAILASAM, JJ.

Pradesh Municipalities Act

Sections 2(23)

Municipal Board, Gorakhpur

Civil Judge, GQrakhpur

Court of Civil Judge, Gorakhpur

Ata Mohd

Civil Judge Gorakhpur

High Court of Allahabad

25th August, 1965

Art. 135

Art. 133(1)(c)

S. 6

S. 118

S. 116

S. 116

S. 116

section 2(23)

section 116

CIVIL APPELLATE JURISDICTION

Allahabad High Court

G. N. Dikshit

S. Markandeya

S. K. Bagga

Rimi Chhabra

KAILASAM

State of Uttiir Pradesh

State of Uttar Pradesh

State of Uttar Pradesh

Court A of Civil Judge. Gorakhpur

Allahabad

Art. 135

Art. 133

Golgarh

Gorakhpur

Ata Mohd

23rd April, 1946

8th May, 1946

13-6- 1947

Civil Judge, Gorakhpur

State of U. P.

Alinagar

State of U.P.

Allnagar

Gorakhpnr

State of Uttar Pradesh

s. 116

Dixit

S. 118

S. 116

S. 116

S. 116(g)

Sll.bba Rao

Madras High Court

Madras

Division Bench of the Madras High Court

section 23

India

S. 116(g)

State of R' U


MANIK CHAND AND ANR. v.

RAMACHANDRA SON OF CHAWRIRAJ

May 8, 1980

[S. MURTAZA FAZAL ALI ANO P. S. KAILASAM, JJ.]

1-~

Specific performance-Enforceability of a contract for purchase of property by a guardian for the benefit_ of the 1ninor--Contract Act, Section I I-Section 8 of the Hindu .Winority Act read with Section 55(5)(h) of Transfer of Property Act.

The appellants-plaintiffs who were minors entered into an agreement on 30-9-1961, through their mother and guardian with the respondent to purchase a house for a sum of Rs. 11000/-. A sum of Rs. 1000/- was paid as earnest 1noney and the balance was to be paid at thei time of the registration of thC sale deed. Since the respondent did not carry out his part of the agreement, the appellants filed a suit for specific perlormance 1 ofi the contract on 28-3-1962 in the Cou11 of Additional District Judge, Gwhlior. The suit was decreed on 15-4-1966. The appellants deposited J1s. 10,500/- the balance of the price on 13-7-1966. The respondent appealed -, o the High Court against the judgment

and decree of the trial court which 'J.llowed the appeal and dismissed the suit: holding that as the contract was entered into on behalf of the minors a decree for specific performance could not be granted ro( want of mutuality.

AIJowing the appeal by special leave, the Court

HELD : I. The contract entered into by the guardian on behaJf of the minors is enforceable. [1108 EJ

2. A minor has no legal con1petence to enter into a contract or authorise someone else on his behalf to enter into a: contract. But under the Hindu Law, the natural guardian is empowered to enter into a contract on behalf of the minors and the contract would be binding and enforceable if the contract is for the benefit of the minor. [1106 Bl

Krishnaswami v. Sundarappayya, IL~ 18 Mad., 415; relferr'edl to.

Mir Sarwarjan v. Fakhruddin Mohd. Chowdhary, JLR 39 Cal.

(PO); Srikakulam Subrahmanyam v. Kurra Subba Rao, 1 Il..R 75 Mad. 115; HanUlJO.. 1nanPrasaud Pandey v. Mussamat Nabooee Munraj Koonwaree (1856) 6 Moor I.A. 393; Mo/10ri Bibee v.

Dhuramodas Ghose, LR. 301 IA 114, Srik(lkulam Subrahmanyam v. Ku"a Subba Rao, ILR 1949 Mad. 143; Suryaprakasam

v. Ganga Raju, A.I.R. 1956 Andb. 33; explained.

3. After the passing of the Hindu Minority i\ct, 19'56, the 1 guardian of a llindu -minor ha') power to do all acts which are necessary or reasonable and proper for the benefit of the minor's estates. Theguardian is entitled to act so as to bind the minor if it is necessary or reasonable and proper for thei behefit of the minor. 'fhe power thus conferred by the Act is in no way restricted than that wa.s recognised under the Hindu Law. Here,· it is quite strange that the respondent should plead that the transaction is not for the benefit of the

(1104)

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MANIK CHAND v. RAMCHANDRA (Kailasam, !.) 1105

nliner when the minor is convinced it is in his benifit and that it is worth A pursuing the litigation upto Supreme Court. [1107 GH, 1108 A-BJ

4. The guardian by the contract for purchase of property does not bind the minor by bis personal covenant. As it is within tho competence of the guar~ dian, the contract is entered into effectively on behalf of the minor ;; nd tbe1 liability to pay the money is the liability of the minor under the Transfer of Property Act. [1108 D~EJ B

CIVIL APPELLATE JURISDICTION : Ovil Appeal No. 1548 of .. 1970.

Appeal by Special Leav!:' from Judgment and Decree dated 9-2-1968 of the M.P. High Court in First Appeal No. 21 of 1976.

Shiv Dayal Srivastava and T. C. Sharma for the Appellant.

Y. S. Chitale, and Rameshwar Nath for Respopdent.

The Judgment of the Court was delivered by,

J(AILASAM. J.

This appeal is by the plaintiffs by special leave granted by this Court against the judgment and decree dated 9-4-1968 pasi; ed by the Division Bench of the Madhya Pradesh High Court in first appeal No. 21 of 1966 dismissing the suit for specific pedormance.

The plaintiffs l and 2 who were minors entered. into an agreement on 30-9-1961 through their mother and guardian Smt.

Pboolibai with the respondent to purchase a house situated in Thandi

Sllrak for a sum of Rs. 11,000/-. A sum of Rs. 1000/- was paid as earnest money and the balance was to be paid at the time of the registration. of the sale-deed.

According to the plaintiffs/appellants, the respondent .did not carry outi his part of the agreement and the appe!lants filed the present suit for specific performance of the contract on 28-3~1962 in the Court of Additional District Judge, Gwalior.

The suit was decreed on 15-4-1966.

The plaintiffs deposited Rs. 10,500 the balance of the price on 13-7-1966. 'Thfl respondent appealed to the High Court against the judgment and decree of the trial court which allowed the appeal and dismissed the suit. The High Court agreed with the findings of the Trial Court on the merits and found that it was the respondents who committed breach of contract but dismissed the suit on the ground that as the contract was entered into on behalf of the minors, a decree for specific perforanance could not be granted to the appellants for want of mutuality.

Mr. Shiv Dayal Srivastava, learned counsel appearing for the appel- B !ants, submitted that the lower Court erred in holding that the contract for purchase of property by the guardian on behalf of the minors is

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A unenforceable due to lack of mutuality and submitted that so long as the transaction is for the benefit of the minor, the defendants. cannot resist the decree for specific performance.

A minor has no legal competence to enter into a contract or authorise someone else on his behalf to enter into a contract.

But under the Hindu Law the natural guardian is empowered to enter into, a contract on behalf of the minors and the contract would be binding and enforceable if the contract is for the benefit of the minor.

One of the earliest cases which dealt with the right of the guardian to enter into a contract on behalf of the minor, is Krishnaswami v.

Sundrappayyar, where a Bench of the Madras High Court held tbat S.11 of the Contract Act does not exclude the power of the guardian of a minor to represent him and enter into contracts on his behalf either beneficial or necessary to the minor under Hindu Law and that the English Law that a minor cannot claim specific performance which proceeds on the ground of want of mutuality, has no application to this country.

The position under the Hindu Law is that a guardian has legal competence to enter into a contract on behalf of the minor fot necessit~· or for the benefit of the estate.

Dr. Chitale, learned counsel for the respondent submitted that he does not dispute the competence of a guardian to enter into a con tract on behalf of the minor if it is for necessity or for the benefit of the estate, but contended tliat the right can only be confined to sale of property and would not extend to the purchase of property. His submission is that regarding the purchase of the property, it involves a minor into an obligation of making a payment and that it would amount to personal covenant by the guardian binding the minor.

In support of his contention, he strongly relied on a decision of the Privy Council in Mir Sarwarjan v. Fakhruddin Molwmad Chowdhury('), which re" versed the view of a Bench of the Calcutta High Court which held that there was no want of mutuality in the case and that the agreementis enforceable against the minors and that the acts of the guardian in thiis country bind the minor though there is no difference between his position and powers and those of a manager. The Privy Conncil held that they were unable to accept the view of the Divisior\ Bench that there was no difference between the position and powers of the manager and those of a guarddn. Holding that it is not within the competence of a manager of a minor's estate or of a guardian of a minor to. bind the minor or the minor's estate by a contract for the purchases of immovable property arid that the minor was not bound by the contract for want of mutuality, the Privy Council held that a decree for specific• per-

(!) !LR 18 Mad 415

(2) !LR 39. Cal. I.

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MA NIK CHAND v. RAMCHANDRA ( Kailasam, J.) 1 10 7

fonance cannot be granted. The Privy Council in a later decision in Stikakulem Subrahmanyam and Anr. v. Kurra Subba Rao(1), held that a ; guardian of a mrnor is competent to enter into a contract on behalf of the mfnor so as to bind him if it is for the benefit of the mmor.

Though the decision of the PriNy Council in Mir Sarwarian v. Fakhrud- ' dm Mohomed Chowdhury (supra) was brought to its notice, tlm

l'iiv1 Council did not refer to it but referred.to its earlier decision in Han; toumanpersaud Pandey v. Mussumat Nabooee Munraj Koon-

WlirEt(') where it was stated that "the act of the mother and guardian in enterig into a contract of sale was an act done on behalf of the minGr appellant." A passage from Pollock and Mulla's Indian Contract l\{lci Specific Relief Acts wherein the observation of the Privy Connell in lvlolwri Biee v. Dhuramodas Ghose( 3 ), that "it is, however, different with regard to contract entered into on behalf of a minor by his. guardian or by a manager of his estate," was referred to. In such a ciise it has been held by the High Courts of India, in cases which arose subseqncn! to the decision of the Judicial Committee, that the contract can be specifically enforced as being within the competence of the guardian to enter into on his behalf so as to bind him by it, if it is for

t~ benefit to'the minor. But if either of these two conditions i~ wanting, , the contract cannot be specifically enforced at all Though the earlier decision of the Privy Council in Mir Sarwarian v. Fakhruddin lffohomed Chowdhury (supra) was not referred to, the observation~ make it clear that it was not followed.

In Srikakulam Subrahmcmyan'

v. Kurra Subba Rao(') the Madras High Court expressed its view that it hod no hesitation to hold that the considered judgment of the Judicial Committee in ILR 75 Mad. 115 must be taken as overruling all the previous decisions based on 32 Cal. 232 (P.C.). The same view was expressed by Subba Rao C.J. of the Andhra Pradesh High Court (as he then was I in Suryaprakasam v. Gangaraju( 5 ), where he held that there could not b~ any essential distinction betwen the contract of sale and contract of purchase. It is unnecessary to go into this. question any further as after the passing of Hindu Minority Act, 1g56, the guardian of a Hindu Minor has power to do all acts which are necessary or reasonable and proper for the benefit of the minor or for realisation, protection .or benefit of the minor's estate.

This provision, makes it clear that the guardian is entitled to act so as to bind the minor if it is necessary or reasonable and proper for the benefit of the

(I) !LR 75 Mad. 115

(2) [1856] 6 Moo. I A. 393.

(3) L. R. 301 T. A. 114.

(4) TLR 1949 M2.d. 143. (') AIR 1956 Andh .. 11.

'' '

minor. The power thus conferred by the Section is in no way restricted than that was recognised under the Hindu Law. It is not disputed

in this case th"at the contract entered into by the guardian is for the benefit .of the minor. It appears quite strange that the respondent should plead that the transaction is not for the benefit of the minoi: when the minor is convinced it is in his behefit and that it is worth pursuing the litigation uptq this Court. It is common knowledge tflat the prices of immovable property have been on the rise and there clin

be no doubt that the transaction is for the benefit of the minor.

Finding himsel( faced with these insurmountable difficulties, Dr.

Chitale, sought to plead that in any event S.8 of the Hindu Minority Act specifically prohibits the guardian from binding the minor by his personal covenant.

The submission was that the contract by the guardian which binds the minor to make a payment, would be in the nature of a personal covenant and as such is excluded by S. 8. In support of his plea, the learned counsel relied on S.55(5)(b) of the Transfer of Property Act and submitted that so far as the payment of the purchase price is concerned, there is personal covenant.

We are 1 unable to accept this contention for it cannot be said that the guardian by the contract was binding the minor by his pernonfil covenant. As it is within the competence of the guardian, the contract is entered into effectively on behalf of the minor and the liability to pay the money is the liability of the minor under the Transfer of Property Act. We are unable to accept the plea that in a contract for purchase of property, the.guardioan would be binding the minor by his personal covenant. In the result we find that the contract entered into by the guardian on behalf of the minors is enforceable. The appeal is, therefore, allowed with cost and the decree passed by the Trial Court is restored.

S.R.

Appeal allowed.

I f.

MANIK CHAND AND ANR

RAMACHANDRA SON OF CHAWRIRAJ

May 8, 1980

Section 8

Section 55(5)(h)

Transfer of Property Act

Additional District Judge, Gwhlior

LR. 301 IA 114

Supreme Court

Transfer of Property Act

Shiv Dayal Srivastava

T. C. Sharma

Y. S. Chitale

Rameshwar Nath

J(AILASAM

Thandi

28-3~1962 in

Additional District Judge, Gwalior

Shiv Dayal Srivastava

Madras High Court

Chitale

Calcutta High Court

Kailasam

Pollock

Mulla

Specific Relief Act

High Courts of India

Mir Sarwarian

Subba Rao

Hindu Minority Act

S. 8

Transfer of Property Act

Transfer of Property Act


l' l

DELHI CLOTH AND GENERAL MILLS CO. LTD. v.

STATE OF RAJASTHAN AND ORS.

May 8, 1980

[N: L. UNTWALIA AND R. S. PATHAK, JJ.]

Exemption from Sales Tax under the Central Sales Tax Act,-"Rayou Tyre Cord Fabric'', whether covered by ite1n 18 of the Schedule to the Rajasthan Sales Tax Act, 1954, so as to qualify for exemption under the Central Sales

1ax Act,-ltem 18 of the Schedule to the Rajasthan Sales Tax Act, 1954,- Whether assessment and payment of_ excise duties under the Additional Duties of .Excise (GOods of Special Importance) Act, 1957, a preconditl'on for claiming exe1nption under the Rajasthan Sales Tax Act and therefore under the Central Sales Tax Act.

Interference by Supreme Court under Art. 136 of the Constitution, whether hatred by Section 15 of the Rajasthan Sales Tax Act.

Section 4(2) of the Rajasthan General Sales Tax Act, 1954 empowern the State' Government, by notification in the Official Gazette, to exempt from tax the sale of any goods or class of goods on such conditions as may be1 specified in the notification.

By a notification dated 1st July, 1958, the RajasthaTI'.

Government unconditionally exeir.pted all varieties of, textiles made wholly or partly of rayon from !st July, 1958.

S. 4(1) of the Rajasthan Sales Tax Act, 1954 provides for exemption from Sales Tax of the goods specified in thci Schedule to that Act provided the conditions mentioned in the Schedule are satisfied. Item 18, inserted in the Schedule by ther Rajasthan Taxation Laws. (Amendment) Act, 1964, included "rayon fabrics" as defined in the Additional Duties of Excise (Goods of Special Importance) Act, 1957. On this, the notification dated 1st July 1958 was. withdrawn as redundant. When Item 18 was

inserted in the Schedule, no conditions were specified therein as a qualification for the exemption. The unconditional exemption from sales tax granted on the sale of rayon fabrics, that is to say, without the condition that additional eXcise duty was paid by the manufacturer, woo withdrawn by a notification dated 5th March, 1973 made by the Rajasthan State Government und<>r s. 4(2) of the Rajasthan Sales Tax Act. The notification provided that in the case of un processed rayon and artificial silk fabrics the exemption; from sales1 tax would apply only if the additional duty is leviable on them under the Additional

Duties of Excise (Goods of Special Importance) Act, !957 and such goods had not specifically been exempted from the said duty and the dealers. thereof furnished proof to the satisfaction of the assessing authority that such duty had been paid,

Item 18 of the Schedule to the Rajasthan Sales Tax exempts from Sales Tax and purchase tax "all. cotton fabrics rayon or artiJicial silk fabrics, woollen fabrics as defined in the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (Central Act 58 of 1957)".

Section 2(c) of the Additional Duties of Excise (GOOds of Special Importance) Act, !956 declares that the e.xpression "rayon or artificial •ilk

(1109)

A fabrics" shall have the meaning assigned to it in Item 22 of the First Schedule to the central Excise and Salt, .'-\ct, 1944, which reads :

"Rayon or artificial silk fabrics" means a1l varieties of fabrics manufactured either wholly or partly' from rayon or artificial silk and includes e111broidery in the piece, in strips or in metifs and Fabrics impregnated or co:ited with preparations of cellulose derivatives or of other artificial plastic materials .... "

The appellant owns an industrial unit, Shriram Rayons, situ..'1'ted at Kota in the Sto'.lte of Rajasthan. It maiWf.actures a product described as "Rayon Tyre

(ord Fabric''. Rayon fibre is spun into rayon and twistd into cord. The cords are arranged lengthwise, and are commonly described as the "warp". They are packed 25 to the inch. By a process of weaving, cotton thread are wefted through a loom across the cords. The wefts are thinner and fewer than the cords, being not more than two to five per inch. The cord component comprises the major content of the product. The unprocessed rayon tyre cord fabric so produced is sold in the form of rolls in the market.

After initial chemical treatment it is put through a process of rubberizing in the tyr~ manufacturing plant. The rayon tyre cord fabric is used as a re-inforcing base in the manufacture of tyres. It is a product generally intended for industrial use.

The rayon tyre cord employed as a component in the manufacture of rayon tyre cord fabric is also sold directly as such.. It is sold packed or cones, somewhat like yarn is sold. Tyre cord is purchased; direct1y by some tyre manufacturers, who by applying the same process of putting in the wefts. convert it into a tyre cord fabric for uSe in the tyre.

The appellant was assessed to sales ta•x by the, Commerci~ Tax Officer for , the years 1969-70 and 1970-71 on the turnover of rayon tyre cord fabric.

The plea that the product fell within the item 8 of the Schedule to th~ Rajasthan Sales Tax Act and therefore was exempt from sales tax; was not accepted. The matter came up for adjudication upto the Supreme Court. By its judgment dated 3rd May 1976 reported in 38 S.T.C. 113 (Delhi Cloth and General Mills Co. Ltd. and Ors. v. B. R. Gupta and Ors.), the Court observed that the controversy "requires careful consideration of the technical processes of manufacturing, of the composition of the 'tyre cord fabric', and an evaluation of opinions of experts on the subject, to be .able to decide the question satisfactorily'', as well as "som~ examination of commercial usoge and terminology or the languageof the market in goods of this type'", and that the. matter was one for determination by the txing authorities.

The Deputy Commissioner (Appeals) was ineanwhile seized of not only the two appeals pertaining to the assessment years 1969-70 and 1970-71 but also appeals against the assessment order for 1971-72 and a provisional assessment for the first six months of the assessment year 1972-73. \Vhen the nppeals

\Vere taken up by the Deputy Commissioner (Appeals) volurninous evidence, both oral and documentary, was led before him. The appeals were, nevertheless, dismissed. Thereafter, the, appellant applied in revision to the Board of Revenue for Rajasthan, but again met with no success. The Board expressed the view that the product Wa$ not a fabric and <lismissed the revision! petitions by their order dated 6th October, 1977. The present appeal<; are directed against that order.

...

DELHI CLOTH MILLS v. RAJASTHAN 1111

Allowing the appeals, the. Court.

HELD : 1. In detern1ining the meaning or connotation of \\'Ords and expres-- sions describing an article or commodity the turnover of which is taxed in a sales tax enactment, if there is one principle fairly well-settled it is that the words or expressions must be construed in the sense in which they are understood in the trade, by the dealer and the consumer. It is they who are concerned with it, and it is the sense in which they understand it that consti- B t'utes the definitive index of the legislative intention when the statute was enacted. As sales tax the liability falls on the seller, who in his turn passes it on to the consumer; -as purchase ta-x, the liability falls directly on the purchaser.

[1115 A-CJ

Porritts and Spencer (Asia) Ltd. v: State of Haryana [1978] 42 S.T.C. 433; followed.

2. On a comprehensive consideration of the materials, it is clear that by and large a tyre cord fabric is regarded as a textile fabric. The peculiar feature that the tyre cord constitutes the dominating element indicating the use to which the fabric is put and the close concentration in which it is packed in contrast to the light density with which the weft thread is woven does not detract from the conclusion that what we have is a textile fabric. It is wholly

immaterial, that once tyre cord fabric has, in the hands of the tyre manufacturer, undergone the process of rubberizing and is embedded in the tyre body the significance of the weft thread is greatly reduced. It may also be thati in the more mern process of manufacturing tyres what is used is cabled rayon With hawser twists with the cords assembled in parallel order and rubberized

without the intermediate process of weaving on a loom. The material on the record, however, indicates that the product manufactured by the appellant does not faJl in-that category. It is a woven fabric in which the intermediate process of weaving the weft thread across the warp cord is an integral stage of manu facture.

When the purchaser buys the product, it is the entire integrated woven fabric which he buys, it is not merely the tyre cord by itself. If'tyre cord was a11 that he desired, he would purchase that commodity, which is readily available, and not tyre cord fabric. Item 22 of the First Schedule to the Central Excises and Salt 'Act speaks of "a11 varieties of fabfics", language wide enough to include the rayon tyre cord fabric manufactured by the nppel !ant. [1117 E-H, 1118 A]

3. Item 22 of the First schedule to the Centr3.l Excise and Salt Act does comprehend "industrial fabrics" as well as the item refers to "all varieties of fabrics''. Further Item 22(3) speaks of fabrics impregnated or coated with p-1tparations of cellulose derivatives or of other artificial plastic materials which would include rubberized cloth, tarpaulin cloth, P.V.C. cloth, water proo:£ cloth and tent cloth. A whole 7ange of fabric is. included.

[1118 B-C]

4. It is futile to suggest that the tyre plays a less substantial role than other popular commodities in modern life. The tyre' manufacturing industry is of growing importance and bas an increasingly important role to play in everyday Jife. ~That is evident from the overwhelming expansion . of automobile traffic prompted by the complex needs of a constantly enlarging economy.

The daily life of the average citizen is prof9undly effected by tlie automobile, H be it passenger bus or a goods truck or the ubiquitous scooter.

Tyres are needed for all. In ntral areas tyres are no\v coming into use for bullock carts.

And, therefore, it is but a short st'ep to recognising the status of what goes into the manufacture of a tyre-the rayon tyre cord fabric as "goods of special importance". It may be that unlike the cotton, silk, woollen and rayon fabrics used as wearing apparel or furnishing material the rayon tyre cord fabric is not directly employed for the satisfaction of a domestic need. Nonetheless, as an integral and vital constituent of an automobile tyre it is intimately involved in the diurnal activity of human life.

[1118 E-0]

 5. Whether Parliament understood the word "fabric" to include tyre cord fabric must gathered from all the relevant material and with reference. to tests and criteria accepted in law rather on the basis of a single notification, like the circular dated 11th February 1957 issued by the Revenue Board Ja.ying down th~ tyre and fabric could not be described as "fabric". [1119 A-B]

6. In respect of the assessment years 1969-70, 1970-71, 1971-72 and the first six months 0; f 1972-73, the turnover of rayon tyre and fo.bric was clearly exempt from sales tax under the Rajasthan Sales Tax Act and there wµ.s no condition in that Act untill 4th March 1973 that the exemption was dependent on payment of additional excise duty under the provisions of Additional Duties of Excise (Goods of Special Importance) Act, 1957. Since from 5th March, 1973 only the exemption from tax under the Rajasthan Sales Tax Act was available only if additional excise duty was leviable, a de3.Ier \'¥\ls entitled to exemption from sales tax upto 4th March. 1973 without the requirement of payment of the additional excise duty.

[1120 B-C, E-F]

7. The question in the instant' caseis not one of fact.

It is a qui-"stion which concerns the construction of Item 22 of the Schedule to the Additional Duties of Excise (Goods of Special Importance) Act, 1957.

If the rayon tyre cord fabric manufactured by the appellant is covered by that item it is exempt from sales tax a"nd there is no jurisdiction in the sales tax authorities to assess the appellant on its turnover. The question is one of substantial importance, and having regard to the circumstances there is good reason for entertaining the appeals and deciding them on the merits. The Supreme Court is entitled to entertain appeals directly, not withstanding, that a reference is. open against the impugned orders before the High Court under Section 15 of the Rajasthan Sales Tax Act. [1120 G-H, 1021 A-Cl

CivIL APPELLATE JURISDICTION : Civil 'Appeals Nos. 2453-2456 of 1977.

Appeals by Special Leave from the Judgment and Ord~ dated the 6th October, 1977 passed by the Board of Revenue for Raja; than: at Ajmer, in revisions for the years 1969-70 1970-71, 1971-72 and 1972-73.

F. S. Nariman and H. K. Puri for the Appellant.

Lal Narain Sinha, and S . . C. Bhandari, Soh, bag Mal Jain and P. P.

Singh for the Respondents.

The Judgment of the Court was delivere<l by

PATHAK, J.

The question raised in these appeals is whether the "Rayon Tyre Cord Fabric" manufactured by the appe11ant is a rayon

>- • ..

• " • ;:

"£Lffi CLOTH MILLS v. RAJASTHAN (Pathak, I.) 1113

fabric covered by item 18 of the Schedule to the Rajasthan Sales Tax A Act; 1954, and therefore .uempt from sales tax under the Central Sllles Tu: Act.

The appellant owns an industrial unit, Shriram Rayons, situated at Kota in the State of Rajasthan. It manufactures a product described as "Rayon Tyre C-0rd Fabric." The appellant claims that the pro- B duct falls within item 18 of the Schedule to the Rajasthan Sales Tax Act which exempts from sales tax and purchase tax :-

"All cotton fabrics, rayon or artificial silk fabrics, woollen fabrics as defined in the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (Central Act 58 of 1957) ." C

Section 2 ( c) of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 declares that the expression "rayon or artifi cial silk fabrics" shall have the meaning assigned to it in Item 22 of the First Schedule to the Central Excise and Salt Act, 1944. Item 22 reads:-

"Rayon or artificial silk fabrics" means all varieties of fabrics manufactured either wholly or partly from rayon or artificial silk and includes embroidery in the piece, in strips or in motifs and fabrics impregnated or coated with preparations of cellulose derivatives or of other artificial plastic materials, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... " '

The appellant was assessed to sales tax by the Commercial Tax Officer for the years 1969-70 and 1970-71 on the turnover of rayon tyre cord fabric.

The plea that the product was exempt from sales tax was not accepted. Two writ petitions were filed by the appellant tn the Rajasthan High Court against the assessments while appeals were also filed before the Deputy Commissioner (Appeals).

The Raiasthan High Court dismissed the writ petitions on the ground that disputed questions of fact were involved in the controversy and recourse should be had to the remedy by way of appeal. Against the order of the High Court the appellant obtained from the Supreme Court special leave to appeal under Article 13 6 of the Constitution.

Meanwhile, the Commercial Tax Officer made a provisional assessment on the turnover of rayon tyre cord fabric for the period 1971-

72. Against the assessment the appellant filed a writ petition dirtly in this Court under Article 32 of the Constitution. The two appeals and the writ petition were dismissed by this Court on 3rd May, 1976.(')

(I) The judgment is reported in De/Iii Cloth & General Mills Co. Ltd. and Others

v, B. R. Gupta and Other. .38 S. T. C. 113. ll-'fi!O SCl/80

1114 sUPREMJl COURt REPOilts [1980] j s.qR.

The Court observed that the controversy "requires careful consideration of the technical processes of manufacturing, of the composition of the 'tyre cord fabric,' and an evaluation of opinions of experts on the subject, to be able to decide the question satisfactorily," as well as "some examfuation of commercial usage and tenninology or the language of the market in goods of this type." It upheld the view taken by the High Court that !he matter wa~ one for determination by the taxing authorities.

The Depty Commissioner (Appeals) was meanwhile seirled of not only the two appeals pertaining to the assessment years 1969-70 and 1970-71 but also appeals against the assessment order fot 1971-72 and a provisional assessment for the first six months of the assessment year 1972-73.

WI:ien the appeals, were taken up by the Deputy Commissioner (Appeals) voluminous evidence, both oral and documentary, was led befoe him; The appeals were, nevertheless, dismissed.

Thereafter, the appellant applied in revision to the Board of Revenue for Rajasthan, but again met with no success. The Board expressed the view that the product was not a fabric and dismissed the revision pe!itions by their order dated 6th October, 1977. The present appeals are directed against that order.

- Some undisputed facts co9cerning the product manufactured by the appellant may be set out. Rayon fibre is spun into rayon and twisted i!llto cord. The cords are arranged lengthwise, and are com- E monly described as the "warp".

They are packed 25 to the inch, By a process of weaving, cotton threads are wefte<l through a loom across the cordS.

The wefts are thinner ilnd lewer than the cords, being not more than two to five per inch. The cord component C(\Jllprises the major content of the product. The unprocessed 'rayon 'tyre

ord fabric •so produced is sold in the form of rolls in the market.

F After initial chemical treatment it is put through a process of rubberi~ zing iin the tyre manufacturing plant.

The rayon tyre cord fabric is used as a re-inforcing base in the manufacture of tyres. It is a product generally intended for industrial use. The rayon tyre cord employed as a component in the manufacture of rayon tyre cord fabric is also sold directly as such. It is sold packed on cones, somewhat G like yarn is sold. Tyre cord is purchased directly by some tyre manufacturers, who by applying the same process, of putting in the wefts, convert it into a tyre cord fabric for use in the tyre.

In holding that the rayon tyre cord fabric is not a fabric, the Board bas noted that the tyre body or carcass consists of a series of layers of cord fabric in the form of plies buried in rubber, and that H the significant factor in the tyre cord fabric is represented by the tyre cord.

The properties and characteristics of the fibre constitutini: the

+'.'::'

' .

• ~-

DELHI CLOTH MILLS v. RAl<\STHAN (Pathak, J.) 1115

tyre cord, it is said, determines the tyre performance. The weft in the . fabric, it is pointed out, merely play~ the subsidiay role of holding the cord in place before the process of tyre manufacturing is commenced.

Now, in determining thei meaning or connotation of word$ and expressrons describing an article or commoditj' the turnover of which is taxed in a sales tax enactment, if there i~ one principle fai!ly wellsettled it is that the words or expressions must be construed in the sense in which they a.re understood in the trade, by the dealer and the consumer. It is they who are concemi; d with it, and it is t!Je sense in which they understand it that constitutes the definitive index of the legislative intention when the statute was enacted. As sales tax the liability falls on the seller, who i:n his tum passes it on to the consumer.

As purc}lase tax, the liability falls directly on the purchaser. A long

train of authorities supports that view, and we need refer only to the recent Judgment of this Court in Porritts and Spencer (Aia) Ltd.,

v. State of Haryana,(') in which reference has been made to some of them. ·

In the record before us, a wide range of material has been incorporated for determining liow those who manufacture and deal in fabrics and, in particular, tyre cord fabric, understand them. . And so, a brief reference to that material is appropriate at this point.

What is a fabric? The "Mercury" Dictionary of Textile Terms E defines "fabric" as a term which covers "all textiles no matter how constructed, how manufactured, or the nature of the material from which made," and the expression "textile" is described as "any product manufactured from fibres through twisting, interlacing, bonding, looping, or any other means, in such a manner that the flexibility, strength, and other characteristic properties of the individual fibres are F not suppressed~" The Man-Made Textile Encyclopaedia (1959) defines fabric as ''.a collective term applied to cloth no matter how constructed or manufactured and regardless of the kind of fibre from which made. In structure it is planar produced by interlacing yams, fibres or filaments. Textile fabrics .include the following vaiieties, bonding, felted; knitted, braided and woven." The Fairchild's Dictionary of G Textiles (1959) a:ys that fabric is ."a cloth .that is woven or knit, braided, netted, with any textile fibre ...... : ... ", and "textile" is said to refer to "a broad cliissification of any material that can be worked into fabric, such as fibres and yarns including woven and knitted fabric, felt, netted fabric, lace and croched goods." In "Textile Terms and Definitions" (1960) the word cloth. is defined as "a H

(!) (1978) 42 S. T. C. 433 .

. > .

::-~·~~;\i:\i;"

1116 SUPREMi COURT REPORTS (1980] 3 s.c.tt

generic term embraci!llg all textile fabrics and laminar felts" and '1ex• tile" is applied in its modern sense" to "any manufacture from fibreS, filaments, or yarns, natural or artificia~ obtmned by interlacing." The 1967 Annual ok of ASTM Standards defines clotb as "any textile fabric but .specially one designed for apparel domestic or industrial use," and textile fabric as "a planar Structure consisting of interlaced yarns or fibres." The 1973 Annual Book of ASTM Standards reproduces those definitions.

We may now examine whether a tyre cord fabric has been Ulldl!i' stood as a fabric. A publication IS: 4910 (Part Vl)-1970, put out by the Indian Standards Institution, defines a "tyre cord fabric" as "a C fabric consisting of tyre cord warp with widely spaced weft threads".

Another publication IS: 1324-1966 of the same institution gives tbe definition of tyre cord fabrics as "fabrics which. comprise the main

carcass of pneumatic tyres constructed predominantly of warp cords . (cabled yarns) with light wefts. The latter merely serve to hold the cords together for processing". The "Mercury" Dictionary of Textile Terms defines cord tyre fabric as a "cloth made with strong corded sheets for the warp with as little weft as possible. . . . . . the warp takes all the strain ....... ". The Fairchild's Dictionary of Textiles de<:ll!res that a tyre cord fabric is not a true fabric today, but originally a square woven fabric was employed in making the pneumatic automobile tyre. "The modern tyre fabric is not woven or knitted, but consists of cabled yarns with hawser twists formerly mostly cotton, now usually of high tenacity viscose rayon or nylon.

These cords are arranged in parallel order and rubberized." The tyre cord fabric manufactured by the appellant admittedly consists of warp and weft and therefore this definition, which.does not refer to an interlaced strncture, wou1li nof apply.

On the contrary, the further definition in the same publication appears to be more pertinent. It says : "When these tyre cords were first made they were assembled as a warp on a loom and held in place until rubberized by an occasional fine single filling yarn, and it is pr<>J>ably due to this that the term "fabric" has remained in use".

Some doubt is created by the definitions included in Linton's Modern Textile Dictionary and River's Dictionary of Texu1e Terms.

But tyre cord fabric is clearly described as a fabric by the 1973 Annual Book of AS'I'M Standards the Textile Terms and Definitions (1960), and in India by the Indian Standard Glossary of Textile Terms Relating to Man-Made Fibre & Fabric Industry. The Man-Made Textile Encyclopaedia in its chapter on Industrial Fabrics gives a structural description of tyre H fabrics and refers to the series of layers of cord fabric buried in rubber in the tyre body or carcass.

The Wellingtion Sears Hand Book of Industrial Textile' describes in some detail the process of manufactur-

"" ..

.,, '

-u---,

• '

_, +

DJ!LHI' CLOTH MILLS v. RAJASTHAN (Pathak, !.) 1117

mg tyre card fabrics. It states that "the tyre cords are woven into a 'fabric' with a very fine cotton or rayon filling yarn, just strong enough to hold the cords together during subsequent handling."

Now Jet us see how the Government of India itself, in its various departments, looks at tyre cord fabrics.

The Revised Indian Trade

Clatioo (1965) published by the Central Government in the Department of Commercial Intelligence and. Statistics lists Viscose. tyre fabric (Code 653 .6125) under the classification Group 653-"Textile

Fabrics, Woven (not inchiding narrow or special fabrics), other than cotton and jute fabrics." The Ministry of Foreign Trade Resolution dated 27th February, 1971 refers separately to rayon tyre yarn, cord . J and fabric, and speaks of tyre cord units producing both twisted cords -,...__ and' woven fabric.

And the Indian Customs Tariff Guide (1 Ith Edi- , tion)shows as item 53 in the Tariff Schedule : "Rayon tyre fabrics, a loosely :woven material with, rextremely thin cotton threads running breadthwise and introduced merely for keeping the artificial silk threads running lengthwise in position." The item is repeated in th!l same terms in the Tariff Schedule to the Indian Customs Tariff Guide (13th Edition). The Table appended to the Customs and P,; ntral Excise Duties Drawback Rules lists "Viscose tyre cord fabric" (2621) under Serial No. ~6 "Textile Fabrics and Hosiery".

On a comprehensive consideration of the material before us, there is no. escape from the conclusion that by a, nd large a tyre cord fabric ;"--- is regarded as a textile fabric. The peculiar feature that the tyre cord constitutes the dominating element indicating the use to which the fabric is put and the close concentration in which it is packed in contmst to the light density with which the weft thread is woven does not detract from the conclusion that what we have is a textile fabric. We are concerned with the product manqfactured and sold by the appellant.

It is wholly immaterial that once tyre cord fabric has, iii the hancjs of ). . the tyre manufacturer, undergone the process of rubberizing and is

'I! embedded in the tyre body the significance. of the weft thread is greatly reduced. It may also be that in the more modem process: of manufacturing tyres what is used is cabled rayon with hawser twists with the cords assembledin parallel order and rubberized without the intermediate

prs of weaving on a loom. The material on the record, however, md1cates that the product manufactured by the appellant aoes not fall

....... in that category. It is a wqven fabric in which the intermediate process of weaving the weft thread across the warp cord is an integral stage of manufacture.

When the purchaser buys the product, it is the entire

iillted woven fabric which he buys, it is not merely the tyre cord H by .lt&elf. If tyre cord was all that he desired, he would purchase that c, ommpdity, wmch is readily available, aq\] pot tyre cord fabric.

i" ....,,'""""~

may also p<iint out that Item 22 of the First Schedule to the P'ntral Excises and Salt Act speaks of "all varieties of fabrics", language wide enough to include the rayon tyre cord fabric manufactured by the appellant.

It was contended by Shri L. N. Sinha, for the respondents, that industrial fabrics are not envisaged within the expression "rayon fabric" in Item 22 of the First Schedule to the Central Excise and Salt Act. As we have already pointed out, the item refers to "all varieties of fabrics" and it will be noticed that Item 22(3) speaks of fabrics impregnated or coated with preparations of cellulose derivatives or of other artificial plastic materials which; we are told, would include rubberized cloth, tarpaulin cloth, P.V.C. cloth, water proof cloth and tent cloth.

A whole range of fabric is included.

It is then urged by Shri Sinha that whn the Additional Duties of Excise (Goods of Special Importance\ Act, 1957 was enacted Parliament could not have intended the expression "rayon fabric" to include rayon tyre cord fabric. It is pointed out that the Statement of Objects

and Reasons pertinent 'to the Act refers to mill-made textiles, and the submission is that the item in the First Schedule to that Act refers to fabric which affects the -common man, which finds place in a popular market and is intended for popular use, and does not refer to a commodity which caters to the needs of a special category of consumers and is devoted to a particular use only.

Now, the tyre manufacturing industry is of growing importance and has an increasingly important role to play in everyday life.

That is evident from the overwhelming expansion of automobile traffic prompted by the complex needs of a constantly enlarging economy.

The daily lifo of the average citizen is profoundly effected by the automobile, be it passenger bus or a goods truck or the ubiquitous scooter. Tyres are needed for all. In rural areas tyres are now corning into use for bullock carts.

It is futile to suggest that the tyre plays a less substantial role than other popular commodities in modem life. And, therefore, it is but a short step to recognising the status of what goes into the manufacture of a tyre--the rayon tvre cord fabric as "goods of special importance". It may be that unlike the cotton, silk, woollen and rayon fabrics used as weanng apparel or furnishing material the rayon tyre cord fabric is not directly employed for the satisl'action of a domestic need.

Nonetheless, as an integral and vital constituent of an automobile tyre it is intimately involved in the diurnal a<; tivity of hnman life.

H We are then told that when the Additional Duties of Exclse (Goods of Special Importance) Act, 1957 was enacted there was in existence a Circular datd 11th February, 1957 issued by the Revenue Board

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D!LHf CLOTH MILLS V. RAJASTHAN (Pathak,!.) 1119

Ia:yini' doWn thiit tyre cord fabric could not be described as a "fabric" within the meaning ot the Central Excise Ttariff. It is said that when that was the popular conception of tyre cord fabrics it could not have been envisaged as a fabric when the statute was enacted. To our mind, the view taken by the Revenue Board cannot be regarded as resolving the question before us.

Whether Parliament understood the word "fabric" to include tyre cord fabric must be gathered from all the relevant material and with reference to tests and criteria accepted m Jaw rather on the basis of a single notification .

We may now turn to the contention of Shri Sinha that the benefit of exemption from sales tax is available to the appellant only if he has paid the additional duty of excise on the. product. It is pointed out ihat the appellant has not been assessed to additional excise duly under the Additional Duties of Excise (Goods of Specilll Importance) Act, 1957 and ig, therefore, not entitled to exemption from sales tax under the C.entral Sales Tax Act.

The Additional Duties of Excise (Goods of Special Importance) Act, 1957 came into force on 24th December, 1957. Sub-section

(1) read with sub-section (2) of s.3 of the Act provide for the levy and collection of an additional excise duly, over and above the excise duty chargeabls under the Central Excises and Sal( Act,.} 944 on certain goods at the rate specified in the Schedule to that Act.

Rayon fabrics are mentioned in the Schedule to the Additional Duties of Excise (Goods of Special Importance) Act, and are classified by reference to Item 22 in the Fil'St Schedule to the Central Excises and Salt Act.

In the present appe3Is, we iire concerned with a claim to exemption from sales tax, and in order to consider the contention of the Reyenue that no such exemption was available to the appellant because 10, bad not paid any additiooal excise duty on rayon tyre cord fabric it is necessary to determine whether indeed the exemption from sales tax was subject to the condition of payment of additional excise <futy.

S.4(2) of the Rajasthan Sales Tax Act, 1954 empowers the State G Government, by notification in the Official Gazette, to exempt from tax the sale of any goods or class of, goods on such conditions as may he specified in the notification. By a notification dated lSt July, 1958, the Rajasthan Government unconditionally exempted all varieties of textiles mide wholly or partly of rayon frC\111 1st July, 1958. S.4(1) of the Rajasthap Sales Tax Act, 1954 provides for exemption from H. sillci tax of the goods specified in the Schedule to that Act provided tbt conditions 111ntio1Jed in the Sched11I~ are satisfid. Item 18, in~

. : : ,_,

1120 (1900} 3 s.c.R.

serted in the Schedule by the Rajasthlm Tamtion Laws(Amendment} Act, 1964, included "rayon fabrics" as defined in the Additional Duties of Excise (Goods of 1Special Importance) Act, 1957.

Ou this, the notification dated 1st July, 1958 was withdrawn as reduncfant.

Now when Item 18 was inserted in the Schedule, no conditions were specified therein as a qualification for the exemption.

Therefore, in respect of thy-assessment years with whi<:h these appeals are concerned, the turnover of rayon tyre cord fabric was clearly exempt from sales •tax under the Rajasthan Sales Tax Act, and there was no condition in that Act that the exemption was dependent on payment of additional excise duty.

That being so, there was an unconditional exemption from central sales tax also.

The unconditional exemption from sales tax grantd on the sale of rayon fabrics, that is to say, without the condition that additional excise duty was paid by the manufacturer, was withdrawn by a noti: fication dated 5th March, 1973 made by the Rajasthan State Government under S.4(2) of the Rajasthan Sales Tax Act.

The notification provided tl)at in the case of unprocessed rayon and artificial silk fabrics the exemption from sales tax would apply only if the additional duty is leviable on them under the Additional Duties of Excise -(Goods of Special Importance) Act, 1957 and such goods had not specifically been exempted from the said duty and the dealers thereof furnished proof to the satisfaction of the assessing authority ti!at such duty had been paid. Therefore, as from 5th March, 1973 the exemption from tax under the Rajasthan Sales Tax Act was available only if additional excise duty was leviable and the dealer had esiablished that he had paid such duty.

About the same time, the Rajasthan Taxation Laws (Amendment) Act, 1973 deleted Item 18 in the Schedule to the Rajasthan Sales Tax Act with effect from Sth March,

1973. It is evident, therefore, that a dealer was entitled to exemption from sales tax up to 4th March, 1973 without the requirement of payment of the additional excise duty. The conclusion is inescapable that even if the appellant did riot pay additional excise duty, he was exempt from sales tax on the turnover of rayon tyre cord fubric for the assessment years under consideration.

Fmally, it is urged by Shri Sinha that the question whether the rayon tyre cord fabric falls within the expression "rayon fabrics" is a question of fuct and the assessing authority, the appellate authority ru1d the revenue Board are all agreed tllat it cannot be classified as a rayon fabric and, therefore, this Court should not interfere in these appeals. It is also pointed out that under s. 15 of the Rajastb11n Sales T11x Act a 'proc; eeding by way of reference is available to

• f j_

DELHI CLOTH MILLS v. RA.JASTHAN (Pathak,/.) itU

the appellant and this C0urt. t'llCn if it were. to cans, idm tbe$: appeals on the merits, should exercise no wider jurisdiction than that available to it if it had entertained a reference.

We are unable to agree that the question is one of fact.

It is a question which concerns the consideration of Item 22 of the Schedule to the Additional Duties of Excise (Goods of Special Iqiport\Ulce) Act,

1957. If, the. rayon tyre cord fabric manufactured by the appellant is recovrea by that item it is exempt from sales tax and there is no jurisdiction in the sales tax authorities to assess the appellant on its turnover. The question is ol)e of substantial importance, and having regard to the circwnstances there is good reason for entertaining the appeals and deciding them on the merits.

In the result the appeals are allowed, the assessments in respect of the turnover of rayon tyre cord fabric manufactured by the appellant relating to the assessment years 1969-70, 1970-71, 197f-72 and the first six months of 1972-73 are quashed. In the circumstances there is no order as to cost.

S.R .. ...

Appeal allowed.

' .. " :...

l

DELHI CLOTH AND GENERAL MILLS CO. LTD

STATE OF RAJASTHAN AND ORS

N: L. UNTWALIA

R. S. PATHAK, JJ.

Central Sales Tax Act

Art. 136

Section 15

Section 4(2)

Rajasthan General Sales Tax Act, 1954

S. 4(1)

Rajasthan Sales Tax Act, 1954

5th March, 1973

Rajasthan State Government

s. 4(2)

Section 2(c)

First Schedule

Kota

Rajasthan

Rajasthan Sales Tax Act

Supreme Court

3rd May 1976

6th October, 1977

First Schedule

Excise and Salt Act

Parliament

11th February 1957

4th March. 1973

Section 15

F. S. Nariman

H. K. Puri

Lal Narain Sinha

S . . C. Bhandari

Soh,

bag Mal Jain

P. P.

Singh

PATHAK

The Judgment of the Court was delivere<l by

PATHAK, J.

The question raised in these appeals is whether the "Rayon Tyre Cord Fabric" manufactured by the appe11ant is a rayon
• ..

• " • ;:

"£Lffi CLOTH MILLS v. RAJASTHAN (Pathak, I.) 1113

fabric covered by item 18 of the Schedule to the Rajasthan Sales Tax A Act; 1954, and therefore .uempt from sales tax under the Central Sllles Tu: Act.

Rayon Tyre Cord Fabric

Section 2

Rajasthan High Court

Raiasthan High Court

Article 13

Article 32

3rd May, 1976

India

Government of India

27th February, 1971

Excise Duties Drawback Rules

First Schedule

Excises and Salt Act

L. N. Sinha

First Schedule

Sinha

First Schedule

Sales Tax Act

24th December, 1957

Rajasthan Sales Tax Act, 1954

Rajasthan Government

Rajasthap Sales Tax Act, 1954

4th March, 1973

s. 15


COMMISSIONER OF INCOME TAX, PATIALA

PIARASINGH

May 8, 1980

[P. N. BHAGWATI, V. D. TULZAPURKAR AND R. S. PATHAK, JJ.]

Losses in business-Deduction under section 10(1) of the Income Tax Act, . 1922.....:./s a smuggler who is taxed on his income from smuggling under the Income Tax Act, 1922 entitled to a deduction under section 10(1) of the Act on account of the confiscation of currency notes e1nployetl in the smuggling activity.

The respondent Piara Singh was apprehended in September 1958 by the Indian Police while crossing the Inda-Pakistan border into Pakistan. A sum

o~ Rs. 65,500/r in currency notes was recovered from his person. On interrogation he stated that he was taking the currency notes to Pakistan to enilble him to purchase gold in that country with a view to smuggling it into India. The Collector of Central Excise and Land Customs ordered the confiscation of the D currency notes.

T ••

In the proceedings initiated by the Income Tax -Officer, ho found that Rs. 60,500/- constituted the income of tlle assesscc from undisclosed sources.

An appeal by the assessee was dismissed by the Appellate Assistant Commissioner. In second appeal before the Income Tax Appellate Tribunal, the. assessee

represented that if he was regarded as engaged in the business of smuggli!lll gold he was entitled to il deduction under section 10( 1) of the Income Tsx Act, 1922 of the entire sum of Rs. 65,500/, as a loss incurred in tho business on the confiscation of the currency notes. The Tribunal upheld the claim to dedliction. It proceededon the basis that the assessee was carrying on a regular smuggling activity which consisted of taking currency notes out of India and exchanging them with gold in Pakistan which was later smuggled into India. The High Court on a reference at the instance of the Revenue answered the reference against the Revenue. Hence the appca:J.

Allowing the appeal, the Court.

HEID : I. The assessee is entitled to the deduction of Rs. 65,500 ;, under section 10(1) of the Income T&x Act, 1922. [1124 C, 1126 BJ

2. The assessce was Oarrying on the business of smuggling a.nd, therefore. was liable to income tax on income from that business. The currency notes carried by the assessee across the border was an essential part of the smuggling operation. If the activity of smuggling can be regarded as a business, those who are rrying on that busine§s must be deemed to be aware that a necessary incident involved in the business is detection by the Customs authorities tnd the consequent confiscation of the currency notes. It is an incident as predictable in the course of carrying on the activity as any other feature of il Having regard to the nature of the activity possible detection by the Cus!oma authoritiCS> constitutes a normal feature integrated into all !hat is implied and involved in ir. The confiscation of the currency notea is a loss OOCll8ion<d in pursuinJ the business; it is a Joss in much th• oam1 'fV•Y as if tho currency

. t-'

C.I.T, V., PIARA SINGH (Pathak, ].) 1123

nbtet bad been stolen or dropped on the way while carrying on the bll!iness.

A It is a lqss which springs directly from the carrying on of the business and is

incidental to it. Applying the principle laid down by this Court in Badridas Daga v. Commissioner of Income Tax the deduction must be allowed. '

[1124 D-B]

Bodridas Daga v. Commissioner of Income Tax, [1958] 34 !TR 10; Commissioner of Income Tax, Gujarat v. S. C. Kothari [1971] 82 lTR 194; applied.

Haji Az; iz and Abdul Shakoor Bros. v. Commi.r.sioner of Income Tax, Bombay City IT, [1961] 41 ITR 350, Sari Hinduji K/wshalji & Co. v. Commr . of Income Tax, A.P. (1973] 8' ITR 112; J. S. Parkar v. V. B.

Palekar an<t Ors. [1974] 94 !TR 616; distinguished and explained.

CivlL APPELLATE JURISDICTION : Civil Appeal No. 2752 of 1972.

Appeal by Certificate from the Judgment and Order dated the 5th November, 1970 of the Punjab and Haryana High Court in Income Tax Reference No. 38 of 1969.

G. A. Shah & Miss A. Subhashini for the appellant.

Naunit Lal & Mr. Kailash Yasudev for respondent.

The Judgment of the Court was delivered by

PA'THAK, J. Is a smuggler, who is taxed on his income from smuggling under the Income Tax Act, 1922, entitled to a deduction under Section 10(1) of the Act on account of the confiscation of currency notes employed in the smuggling activity ?

The respondent, Piara Singh, was apprehendei:J in September, 1958 by the Indian Police while crossing the Inda-Pakistan border into Pakistan.

A sum of Rs. 65,500/- in currency notes was recovered from his person. On interrogation he stated that he was taking the currency notes to Pakistan to enable him to purchase gold in that country with a view to smuggling it into India.

The Collector of Central Excise and Land Customs ordered the confiscation of 'thtj. currency notes.

The Income Tax Officer now took proceedings under the Indian Income Tax Act, 1922 for assessing t11e assessee's income and determining his tax liability. He came to'the finding that out of Rs. 65,500/- G an amount of Rs~ 60,500/- constituted the income of the assessee from undisclosed sources. An appeal by the assessee was dismissed by the Appellate Assistant Commissioner. In second api\ea! before the Income Tax Appellate Tribunal the assessee represented that if be was reprded as engaged in the business of smuggling gold he was entitled to a deduction iinder Section 10 (1) of the Income Tax Act of the H entire sum of Rs. 65,500/- as a loss incurred in the business on the confiscation of the currency notes. The Appellate Tribunal upheld the

-:2: _,.-

MRB~E COURT REPORTS [1980) 3 s.c.R.

.&. cllloii!l tQi QedtiQn. lt pr~®d on the basis that. t~ ses~ cauying oa a regular smuggling activity which consisted: of tllltiiJg currency notes out of India and exchanging them for gold in Pakistan which was later smuggled into India. At the instance of the Revenue, a reference was made to the High Court of Punjab and Haryana on the following question : " "Whether on the facts and in the circumstances of the case the loss of Rs. 65,500/- arising from the confiscation of the currency notes was an allowable deduction under section 10 ( 1) of the Income-tax Act, 1922 ?"

The High Court answered the question in the affirmative. c And now this appeal by the Revenue.

In our Judgment, the High Court is right. The Income Tax authorities found that the assessee was carrying on the business of smuggling They held that he' was, therefore, liable to income-tax on income from that business.

On the basis that such income was mxable, the D question is whether the confiscation of the currency notes entitles the assessee to the deduction claimed. The currency notes clirried by the assessee across the border constit.uted the means for acquiring gold in Pakistan, which gold he subsequently sold in India at a profit.

The currency notes were necessary for acquiring the gold.

The carriage of currency notes across the border was an essential part of E the smuggling operation.

If the activity of smuggling can be regarded as a business, those who are carrying on that business must be deemed to be aware that a necessary incident involved in the business is detection. by the Custom authorities and the consequent confiscation of the currency notes.

It is an incident as predictable in t41) F COl; lrSe of cmrying on the activity as any other feature of it. Having regard to the nature of the activity possi\)le detection by the Custo,111s authorities constitutes a normal feature integrated into all that is implied and involved in it.

The confiscation of the currency notes is a loss occasioned in pursuing the business, it is a loss in much the sMD.e way as if the currency notes had been stolen or dropped on the G way while carrying on the business. It is a loss which springs directly from the carrying on of the business and is incidental to it. Applying the principle laid down by this Court in Badridas Daga v. Commissioner of Income-tax(') the deduction must be allowed.

In Commissioner of Income-tax, Gujarat v. S.C. Kothari(') this Co1,1It held that for the purpose of Section 1 Q ( 1 ) of the Inc0tne Tax H At, 1922 a loss incurred in carrying on an illegal business wust be .

(I) (l9S8) 34 I. T. R. 10.

(2) (1971) BZ I. T. R. 794

... '

.·~

.·~.·.·.·

• f

.'---

• ..

tJ.t v .. ' iilAilA SINGH (f>atJiak, J.) .

deducted before the true figure of profits brought to tax caa A Wlllputed.

Grover, J., speaking for the Court, observed :

M the business is illegal, neither the profits earned HOr the lesses mourred woold be enforceable . in law. But, tl!at dCJes not take the profits out of the taxing statute.

Similarly, the taint of illegality of the business cannot detract from the losses being taken into account for computation of the llilJ.ount Which <.-.ill be subjected to tax as ''t>rofits" under section 10(1) of the Act of 1922. The tax cOllector cannot be heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business.

That cannot be done without deducting the losses and the legitimate .. e11penses of the business."

Reliance was placed by the Revenue on Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, Bombay City fl(') In that case, however, the assessee carried on the lawful business of importing dates from abroad and selling them in India.

Thei import of dates by steamer was prohibited.

Nonetheless he imported dates from Iraq by steamer, and the eonsignments were confiscated by the customs authorities. But the dates were released subsequently on payment of fine. The assessee's claim to deduction under

s. 10(2) (xv) of the Ineome Tax Act was rejected on the ground that the amount was Nid by way of penalty for a breach of the law. An infraction of the law was not a normal incident of business carried on by the assessee, and the penalty was rightly held to fall on the assessee in some character other than that of a trader. Reference w, as made by the Revenue to Soni Hinduji Kushalji & Co. v. Commissioner of Income-tax, A.P( 2). The assessee's claim to the deduction of the value of gold confiscated by the. customs authorities was ound unsustainable by the court. The decision in that case can b~ explained on the ground that the assessee was carrying on a lawful business in gold, silver and jewellery and committed an infraction of the law h1 smuggling gold into the country. Our attention has also been invited to J. S. Parkar v.

V. B. Palekar and Others(') where on a difference of opinion between two learned Judges of the Bombay High Court a third learned Judge agreed with the view that the value of gold confiscated by the customs authorities in smuggling operations was not entitled to deduction against the estimated and assessed income. from an undisclosed 'ource. It was observed that the Joss arose by reason of an infraction

(J) (1961) 41 I. T. R. 350.

(2) (1973) 89 I. T. R. 112 .

(3) (1974) 941. T. R. 616.

SUPREME COURT REPORTS [1980] 3 s.c.R.

A of the Jaw and as it had not fallen on the assessee as a trader or business man a deduction could not be allowed. Apparently, the true significance of the distinction between an infraction of the law "committed in the carrying on of a lawful business and an infraction of the law committed in a business inherently unlawful and constituting a normal incident of it was not pointedly placed before the High Court B in that case.

We hold that the assessee is entitled to the deduction of Rs. 65,500/-, and accordingly we affirm the view taken by the High Court on the question of law referred to it.

The appeal fails and is dismissed with costs.

S.R.

Appeal dismissed.

... '

COMMISSIONER OF INCOME TAX, PATIALA

May 8, 1980

P. N. BHAGWATI

V. D. TULZAPURKAR

R. S. PATHAK, JJ.

section 10(1)

Income Tax Act, 1922

section 10(1)

Piara Singh

Pakistan

India

Central Excise and Land Customs

Income Tax Appellate Tribunal

section 10( 1)

Income Tsx Act, 1922

section 10(1)

G. A. Shah

A. Subhashini

Naunit Lal

Kailash Yasudev

PA'THAK

Income Tax Act, 1922

Section 10(1)

Section 10

High Court of Punjab and Haryana

section 10

Income-tax Act, 1922

Section 1

Grover

section 10(1)

Iraq

s. 10(2)

Bombay High Court

SUPREME COURT REPORTS [1980] 3 s.c.