CIIlEF SECRETARY TO GOVERNMENT OF

ANDHRA PRADESH & ANR.

V. J. CORNELIUS ETC.

February 18, 1981

[A. P. SEN AND E. S. VENKATARAMIAH, JJ.]

Andhra Pradesh Revised Scales of Pay Rules 1969, Rule 3(2) & Fundan1ental Rules, Rule 22(a) (ii)-Fixation of pay-Provision that juriior e1nployee in selection grade of lower post not to draw more pa!' than his senior holding y-- C a higher post-Validity of. (

To implement the recomn1endations of a oneman Pay Comn1ission, the State Government issued the Andhra Pradesh Revised Scales of Pay Rules, 1969 iiroviding for the revision of pay and creation of selection grade posts.

The selection grade scale was fixed by adding three increments to the maximU.m

of the revised scale of pay.

While implementing the pay scales, the Government realised that a senior holding a perma.nent post in one category but holding a post in the next higher grade on promotion would draw less pay in the higher post than a junior in the lower category who was given the selection grade.

To avoid the anomalous situation thus created the Government by an executive order directed that the pay of an employee placed in selection grade shall be so fixed as not to exceed the pay of his senior working in the higher post on promotion.

This executive instruction was struck down by the High Court as being "iolative of Articles 14 and 16 and also on the ground that the executiveinstruction could not prevail over Fundamental Rule 22 (a) (ii).

F The Government thereupon introduced Rule 5(2) in the Rules with retrospective effect from the date of the original order. In D. Krishnamurthy & Ors v. State of Andhra Pradesh & Anr. this rule was struck down by the High Court as being violative of Articles 14 and 16.

No appeal was, however, :._ __ preferred from the judgment of the High Court striking down the rule.

Instead of following a uniform policy in reviSing the pay of all employees G in compliance with the direction of the High Court, the Government re-fixed the pay of some of the employees holding selection grade posts but declined to do so in the case of others on the ground that the re-fixation would be done only in the case of employees who had secured such directions.

In the appeals by tho Government to this Court it was contended that it was wrong to suggest that since no appeal had been preferred against the H judgment of the High Court in D. Krishnamurthy's case all the judgments t:X the High Court involving a similar question had become final D. Krishnnmurthy's case related to an altogether different category of em.· ployees of the State Government.

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Dismissing the appeals,

HEID : I. When the Higb Court issues a writ, direction or order under Art 226 of the Constitution, it is not open to the State Government to imple ment the decision with regard to some and deny relief to others, although they

belong to the same class of persons, and are equally governed by the principle& laid down. The State Government is expected to adopt a uniform policy in

regard to all its employees. [936 C-DJ B

2, Replacement of an executive instruction by the State Government by a rule framed under Art. 309 of the Constitution, for the fixation of pay of a per~ son promoted to the Selection Grade at a stage lower than the minimum of the scales of pay of such Selection Grade so as not to exceed the pay of his seniors working in the higher posts on promotion, does not cure the constitutional vico inherent in the Government action as the provision is violative of Arts. 14 and C 16 of the Constitution. [935 G-HJ

3. The judgment of the High Court, by which sub-r. (2) of r. 5 of the Andhra Pradesh Revised Scales of Pay Rules, 1969 having been struck down as offending A1ts. 14 and 16 of the Constitution and as being not in conformity with FR 22(a) (ii) not having been appealed from, had attained a finality and

the re-fixation of pay, if any, had to be done as if sub-r. (2) of r. 5 never D existed. [937 BJ

4. It is not open to the Government to question the correctness of the judgment of the Jfigh Cou11 when it had attained finality, particularly when in compliance \Vith the directions, it had re-fued the pay of some of the employees in the Selection Grade posts, on the pretext that the right of appeal was not Jost in the case of others in respect of whom no such direction has been issued.

At E any rate, the point not having been taken before the High Court, could not be allowed to be raised for the first time under Art. 136 of the Constitutien.

[936 HJ

CML APPELLATE JURISDICTION: Civil Appeal No. 383 of 1976.

Appeal by special leave from the Judgment and Order dated 12-6-1975 of the Andhra Pradesh High Court in Writ Appeal No. 313 of 1975.

Connected with

Civil Appeal Nos. 1434-85/77, 2669/79 & 2670/79, 1763-1781/ 77, 2511, 2625, 2679, 2776/77, 332, 333, 909 & 930/78 and S.L.Ps.

1768-70/76, 1769/77, 4246, 4379/77 and 251/79.

P. Rama Reddy, G. S. Narayana and G. N. Rao for the Appellant in all the matters .

B. Parthasarthy for the Respondent in CAs 383/76, 1443/77, 1444/77 (for R. 5), CA 1456/77 (for RR. 2 & 4), CA 1461/77 for ( R.17), CA 1463/77 for RR-1 & 2 and R. 10 in CA 1464/77 for R.1 H in CA 1466/77 for R.1, 1468/77 for both the Respondents, 1470/ 77 for R. 1, CA 1476177 for R. 2, 1481 for RR, 1767/77 for R. 1,.

1768/77 for RR 1, 2, 4, and 5-8, 1773/77 for RR 1-4 and 5 2625/ 77 for R 1, 2511/77 for all the Rfu. 132/78 for R.3, 930f78 for RR. SLP 1769/76 for RR 1-4, 5 & 7.

K. Ram Kumar and Mrs. J. Rarnacha11dran for the RR in CA 1472/77, CA 1473/77 for RR 1-5, 7, 8, 14, 15 and CA 1485 for all RRs.

A. Subba Rao in CA 1434 for RRl. 3, 4, 7 .• 8, 9 & 11, in CA 1440/77 for RR 1, 2, 3, 4, 6, 7, 10, 11, 13 & 16, in CA 1457 /77 for Respondent (Sole), CA 1459/77 for RR 2, 3 and 4, CA 1484/77 for RR 1-2, 16-20, 22, 23, 28, 30, 32, 35 and in CA 1764/77 for Respondent (Sole).

G. Narasimhulu for all the Respondents in CA 1781/77.

B. Kanta Rao for RR 1-3 in CA 1441/77, in CA 1442/77 for RR. 4, 8-11, 14, 15, 23 and 24, in CA 1769/77 for RR 1-35, 37-47, 49-62, 64, 65, 67-79, 81-83, 85, 87, 89, 91-99, 101-104, 106-108, 110-114, 116-117, 119-123, in CA 2670 for RR 1-5, 7-12 and 14-16 D and 19-20 and in SLP 251/79 for RR 1-8.

The Judgment of the Court was delivered by

SEN, J.-This and the connected 81 appeals by special leave and seven special leave petitions directed against various judgments and E orders of the Andhra Pradesh High Court and the Andhra Pradesh Administrative Tribunal, raise a common question: Whether it is permissible for the State Government of Andhra Pradesh to enforce sub-r.

(2) of r. 5 of the Andhra Pradesh Revised Scales of Pay Rules, 1969 (hereinafter referred to as 'the Rules') issued by the State Government under proviso to Art. 309 of the Constitution.

That depends

I<' on whether the Government is competent to withhold the Selection Grade pajscales contrary to FR 22(a) (ii) to which the respondents ___ were entitled on their being appointed to Selection Grade posts. The Government tries to justify such fixation of pay at a lower level than the minimum of the Selection Grade pay-scales on the basis that it was to ensure that seniors holding higher posts do not draw in such G higher posts a pay less than what is drawn by their jun[ors in the lower posts in the Selection Grade.

The litigative propensities of the Government know no bounds. , The Government still assumes that it is within their powers to fix the pay of the respondents lower than the minimum of the pay scales of H the Selection Grade posts to which they were promoted although the High Court has unequivocally struck down the impugned. sub:r. (_2) of r. 5 of th~ Rules as ultra vires the State Government bemg v10lat1ve

_,_

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CHIEF 5ECY. TO GOVT. OF ANDHRA PRADESH V. CORNELIUS 933 (Sen, J.) of Arts. 14 and 16 of the Constitution and being contrary to FR 22 A (a)(ii). It is somewhat unfortunate that the GO\ornment should have embarked upon this course of action, thereby subjecting thousands of their employees into this fruitless litigation, which is nothing but an exercise in futility, resulting in wasteful expenditure of public money.

We wish to impress upon the Government that they are in duty bound to respect the judgments and orders of the" courts pro- B nouncing upon the constitutional validity of the various rules, orders and 11otifications issued by the Executive .

To bring out the point involved, it is newssary to state a few facts.

By G.O. MS. 173, Finance, dated June 13, 1969, the State Government issued the Andhra Pradesh Revised Scales of Pay Rules, 1969, providing for revision of pay and creation of Selection Grade posts, the number of such Selection Grade posts for every category being limited to 15% of the total number of posts in that category with a view to implement the recommendations of the One-man Pay Commission appointed for the purpose.

The Selection Grade scale was fixed by adding three increments to the maximum of the revised scale of pay. The pay-scales for the Selection Grade so fixed were found to have a higher start than the minimum pay prescribed for the next higher category of posts.

Some of the senior persons holding permanent posts in one category, but holding posts in the next higher category on promotion were found to draw less pay in the higher posts as compared to their juniors in the lower category who were given the Selection Grade scale of pay. The Government felt that this would result in serious discontentment among the senior employees holding higher posts but drawing less pay than the minimum prescribed for the Selection Grade in the lower category. At a meeting of the Secretaries to Government held on June 24, 1969, it was decided to set right this anomalous position, by the issue of an executive order.

Consequently, the Government issued a departmental instruction in U.O. Note No. 808/PC/69-I dated July 26, 1969, directing that the pay of an employee placed in the Selection Grade shall be so fixed as not to exceed the pay of his seniors working in the higher post on promotion.

Para 3 (iii) of the U.O. Note was as follows:

(iii) Since in many cases, the minimum of the 'selection grade' is higher than the minimum of the next higher grade, there is a possibility of a junior appointed to 'selection grade' hereafter drawing more pay than his senior who has already been promoted to higher grade.

With a view to .tvoid snch an anomaly, it will be necessary to prescribe that a person H promoted to a 'selection grade' shall draw the minimum f the remedy was by way of an appeal. That ju<lginent has attamed a ·

A promotion category should be drawing less than such minimum his pay shall be limited to the pay being drawn by such senior, in his own scale.

The direction contained in para 3(iii) of the aforesaid U.O. Note was struck down by Chinnappa Reddy, J. in S. A. Prabhakar & Ors.

v. Government of Andhra Pradesh by his judgment dated December 26, 1973, on the ground that the executive instruction could not prevail over FR 22{a) (ii) and secondly, fixation of pay at anything lower than the minimum of the scale of pay sanctioned for the Selection Grade posts was violative of Arts. 14 and 16 and was also contrary to the Directive Principles of State Policy enshrined in Art. 39 of the Constitution, according to which there shall be equal pay for equal work. The learned Judge was of the view that the Government having created Selection Grade posts carrying a certain scale cf pay and having appointed persons to those posts, it was not open to them to allow that pay to some and deny to others on the ground that their seniors working elsewhere were not drawing the same scale of pay.

The Government preferred a Letters Patent Appeal against the judgment of Chinnappa Reddy, J., and made a grievance that while the writ petition was pending the offending U .0. Note (No. 808/PC/ 69-I dated July 26, 1969) had been substituted by sub-r. (2) of r. 5 of the Rules issued under GO MS 215, Finance, dated September 5, 1973, with retrospective effect from March 19, 1969.

That being so, the Division Bench dismissed the appeal observing that the appropriate remedy was to file a review petition.

Against the judgment of the Division Bench, the Government preferred a petition for grant of special leave in the Supreme Court under Art. 136 of the Constitution, being SLP (Ciy:il) No. 1878 of 1975 and this Court issued a showcause notice to the respondents on September 28, 1975. But the Special Leave Petition was ultimately dismissed as withdrawn on October 27, 1978, in view of the fact that a review petition had been filed.

Sub-r. (2) of r. 5 of the Rules, inserted by G.O. MS. 215, F1nance, dated September 5, 1973, reads:

(2) Notwithstanding anything contained in sub-rule (1) or any other rule relating to fixation of pay, if a person in any post is promoted or appointed to the selection grade in that post he shall draw the minimum of such selection grade provided that if any of his seniors, who is promoted or appointed by transfer to a higher post, draws a pay in that

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(Sen, /.) higher post less than such minimum, his pay shall be limited A to the pay so drawn by his senior.

Explanation.-For the PllllPOSe of this sub-rule, a person shall be deemed to be a senior tO another even though both of them belong to two different classes, categories/ grades, provided these-two are sources for promotion or appointment by transfer to a higher post.

In D. Krishnamurthy & Ors. v. State of Andhra Pradesh & Anr. (Writ Petition No. 4459 of 1972), Muktadar, J., by his judgment dated August 12, 1974, struck down the rule as it was violative of Arts. 14 and 16 of the Constitution. The. learned Judge observed that in view of the decision of this Court in B. S. Vadera v. Union of India & Ors.(') it was settled Jaw that rules framed under the proviso to Art 309 of the Constitution, whether retrospective or prospective in effect, must be enforced, if framed by the appropriate authority, unless it can be shown that the rules so framed are in violation of any of the rights guaranteed under Part Ill or any other provision of the Constitution.

He was of the view that sub-r. (2) of r.5 of the Rules does not satisfy the test because it takes away the rights to equality before the law and equality of opportunity in matters of public employment, guaranteed under Arts. 14 and 16 and was, therefore, void and uncon;; titutional.

He was dealing with the case of Deputy Tahsildars in the Nizamabad District who were promoted to the Selection Grade bnt could not draw their pay of Selection Grade because it exceeded the pay of their irr.mediate seniors working as Tahsildars, by reason of sub-r. (2) of r.5 of the Rules. The learned Judges observed that if FR 22(a) (ii) was appli cable, nnd there was no reason why it should not be made applicable, the pay of the Deputy Tahsildars in the Selection Grade could not be fixed at less than Rs. 500 which was the minimum of the time-scale . -.4 fixed for the Selection Grade of Deputy Tahsildars. According to him, -sub-r. (2) of r.5 was per se discriminatory because a Deputy Tuhsildar in the Selection Grade with no seniors promoted to a higher post could draw minimum pay of snch Selection Grade; but a Deputy Tahsildar in the Selection Grade who unfortunately had a senior iPr<>- moted to a higher post who drew a pay in that higher post which was less tha.n the minimum of the scale of pay of Selection Grade Deputy ' #

Tahsildar, could not draw more pay than that drawn by his senior, although he was performing the same duties and discharging the same responsibilities attached to such Selection Grade posts for which higher emoluments had been prescribed. The learned Judge observed : "To • 1 put in the words Chinnappa Reddy, J. it amounts to denial of the

(I) [1968] 3 S.C.R. 575.

A principle of 'equal pay for equal work' enshrined in Art. 39 of the Constitution as one of the Directive Principles of State Policy and violates Arts. 14 and 16 which guarantee equality before the law and equal opportunity in the matter of public employment."

The appellant, in the supplementary affid-avit filed by the Deputy Secretary to Government of Andhra Pradesh, Finance and Planning Department {Finance Wing) admits that the judgment of Muktadar, J., in Krishnamurthy's case supra had become final because steps were not taken in time to go in appeal; but, nonetheless, asserts that since the matter before the learned Judge related to Selection Grade Deputy Tahsildars, it was wrong to suggest that all the judgments of the High Court involving a similar question h-ad become final, or that the Government had lost its right of appeal in other similar matters. We are really at a loss to appreciate this attitude on the part of lhe Government in showing scant respect to the High Court -although the judgments had become final and the point involved was one and the same.

D There has been total failure on the part of the Government to realie that the replacement by sub-r. (2) of r.5 of the Rules, of the executive instruction contained in the U.0. Note, does nc! cure the constitutional vice inherent in the governmenl'al action.

This is nothing but a plea of justification for the Government had, . in the meanwhile, on the strength of the offending U.O. Note and snb-r.

(2) of r. 5, promoted thousands of their employees to SeJection Gratle posts in different departments, but fixed their pay at a tPOint lower than !he pay drawn by their seniors in the next higher grade. There h-ave been several judgments of the High Court and of the Andhra Pradesh Administrative Tribunal on writ petitions filed by the persons so affected.

The Government, instead of following a uniform policy, have refixed the pay of some of the employees holding Selection Grade posts,-- ~- in compliance with the directions of the High Court, but declined to do so in the c-ase of others on the pretext that the re-fixation would be

G done only in the case of ema:iloyees who have secured such directions.

It is impressed upon us that the Government wants a decision on merits as the matter involved a question of principle. We were asked

to determine the validity of sub-r. (2) of r.5. It was urged that the Government wants a clear pronouncement on the extent of their powers • in the matter relating to fixation of pay of a person appointed to the Selection Grade, in accordance with sub-r.(2) of r.5. We are afraid, the question does not arise in these appeals. It is quite clear fr,)m the judgments under appeal that the validity of sub-r. (2) of r.S was not in question. We are constrained!<> oerve that if the Government wanted

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CHIEF SECY. TO GOVT. OF ANDHRA PRADESH V. CORNELIUS 937 (Sen, J.) to question the correctness of the judgment in D. Krishnamurthy's case, the 'selection grade' provided that if his senior in the higher finality which cannot now be upset. In that judgment, Muktadar, J ., struck down sub-r. (2) of r.5 as ultra vire~ the Government as being violative of Arts. 14 and 16 of the Constitution and as being not in conformity with FR 22(a) (ii). The effect of the judgment of Muktad:ir, J., in Krishnamurthy's case (supra) is that sub-r.

(2) of r.5 is wiped out for all purposes and the re-fixation will have to be done as if sub-r. (2) of r. 5 never existed. The whole attempt of the Government in filing these appeals is to retrieve the lost ground which cannot be permitted.

In the result, the appeals and the specioal leave petitions are dis- C missed. There shall be no order as to costs.

N.V.K.

Appeals & Petitions dismissed.

CHIEF SECRETARY TO GOVERNMENT OF ANDHRA PRADESH & ANR

V. J. CORNELIUS ETC

February 18, 1981

A. P. SEN

E. S. VENKATARAMIAH, JJ.

Articles 14 and 16

Articles 14 and 16

D. Krishnamurthy

D. Krishnnmurthy

Art 226

Art. 309

Arts. 14

Art. 136

P. Rama Reddy

G. S. Narayana

G. N. Rao

B. Parthasarthy

K. Ram Kumar

J. Rarnacha11dran

A. Subba Rao

G. Narasimhulu

B. Kanta Rao

SEN

Andhra Pradesh High Court

Andhra Pradesh Administrative Tribunal

State Government of Andhra Pradesh

Art. 309

Arts. 14 and 16

June 13, 1969

June 24, 1969

Chinnappa Reddy

December 26, 1973

Arts. 14 and 16

Art. 39

July 26, 1969

September 5, 1973

March 19, 1969

Supreme Court

Art. 136

September 28, 1975

October 27, 1978

Muktadar

August 12, 1974

Arts. 14 and 16

Art 309

Arts. 14 and 16

Nizamabad District

[1968] 3 S.C.R. 575

Art. 39

Arts. 14 and 16

Krishnamurthy

Arts. 14 and 16

Muktad:ir


COMMISSIONER OF INCOME TAX,

BANGALORE ETC. ETC.

B. C. SRINIVASA SETTY, ETC. ETC.

February 19, 1981

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

Goodwill of a nett:ly conunenced business-Whether, (i) a capital asset and

(ii) if so, an asset falling within the contemplation of section 45 of Income Tax Acr, 1961 giving rise to a capital gain.

C The assessee, a registered firm, manufactured and sold agarbattis.

Clause

(13) of the Ins1ru1ncnt of Partnership executed on 28th of July, 1954 and subsequently extenda~ by another instrument dated 31st March, 1964 showed that the goodv;1ill of the firm had not been valued, and the valuation would be made on dissolntion of the partnership. The assessee firm was dissolved by a deed dated 31st December, 1965. At the time of dissolution the goodwill of the firm was valued at Rs. 1,50,000/-. A new partnership by the same name io was constituted under an instrument subsequently and it took over all the assets including the goodwill and liabilities of the dissolved firm.

The Income Tax Offieer made an assessment on the dissolved firm for the assessment year 1966- 67 but did not include any an1ount on account of the gains arising on transfer of the goodwill. 'fhc Commissioner, being cf the view that the assessment order was prejudicial to the Revenue, decided to invoke his revisional jurisdiction and setting aside the assessment order directed the Incon1e Tax Officer to E make a fresh assessment r1fter taking into account the capital gain arising on the sale of the goodwill. The Income Tax Appellate Tribunal in appeal accepted the contention of the assessee that the sale did not attract tax on capi ... ta! gains under section 45 of the Income Tax Act, 1961. The High Court o~ Karnataka on a reference, at the instance of the Commissioner of Income Tnix

affirmed the Tribunal's view and held that the value of the consideration receiveed by the assessee for the transfer of its goodwill was not liable to capit&l gains f1 tax under section 45 of the Income Tax Act. Hence the three a'Jlpeals as to the taxability of the transfer of the goodwill to capital gain tax.

Dismissing the appeals, the Court

HEID: 1. The gocxlwill generated in a newly commenced business cannot be described as an asset within the terms of section 45 of the Income Tax Act, G 1961 and therefore its transfer i'l not subject to Income Tax under the head "capit_al gains". [946 B-C]

2.1. Goodwill denotes the benefit arising from connection and reputation.

The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill fronL the start. It is generated as the business. is carried on and may be augmented with the passage of time.

A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business.

And yet because of its intangible

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C.I.T, V. B. C. SRINIV ASA 939

-natW'e, it remains insubstantial in form and nebulous in character. In a progres• A sing business goodwill tends to show progrive increase.

And in a failing business it may begin to wane.

Its value may fluctuate from one moment to another depending on changes in the reputation of the business.

It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, ill location, its impact on the contemporary inarket, the prevailing socio-economic ecology, intrOOuction to old customers and agreed absence of competition. Thero B can be no account in value of the factors producing it.

It is also lillpossible to predicate the moment of its birth. It comes silently into the world, unhearalded • and unproclaimed and its impact may not be visibly felt for an undefined period.

--4

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Imperceptible at birth it exists enwrapped in a concept, growing or fluctuating with the numerous imponderables pouring into, and affecting the business. [942 F, H, 943 A, E-H, 944 Al

Crultwell v. Lye, 1810, 17 Ves 335; Churton v. Douglas, 1859 John 174; Tregu v. Hun1, 1896 A.C. 7; Commissioner of Inland Revenue v. Muller &: Co.'s Margarine Limited, [1901] A.C. 217. quoted with approval.

3.1. Section 45 of the Income Tax Act operates if there is a transfer of a carital asset giving rise to a profit or gain. The expression "capital asset" def med in section 2 ( 14) to mean "property of any kind held by an assessee" is of the widest amplitude and covers all kinds of property except the property expressly excluded by clauses (i) to (iv) of the sub-section which do not include goodwill. [942 D-E]

3.2. Section 45 is a charging section, charging the profits or gains. arising from the transfer of a capital asset to income-tax, according to the detailed provisions for computing the profits or gains under that head. The charging section and the computation provisions together constitute an integrated code~ When there is a case to which the computation provisions caonnot apply at all, it is e\'ident tha-t such a case was not intended to fall within the charging section.

(944 C, D-E]

3.3. The mode of computation and deductions set forth in section 48 provides the principal basis for quantifying the income chargeable under the head "capital gains". Section 48 contemplates an asset in the acquisition of which it is possible to envisage a co5t. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it.

None of the provisions pertaining to the head "capital gins" suggests that they include an asset in the acquisition of which no cost at all can be conceived.

[945 A, C-E]

3.4. The date of acquisition of the asset is a material factor in applying the computation rrovisions perta-ining to capital gains. The "cost of acquisition" mentioned in section 48 ilnplies a date of acquisition, an inference as strengthen~ ed by the provi<iions of sections 49, 50 and sub-section (2) of section 55. If the goodwill generated in a new business is regarded as acquired at a cost and subsequently passes to an assessee in any of the modes specified in sub-section ( 1) of section 49, it v.ill become necessry to determine the cost of acquisition to the previous owner.

I-laving regard to the nature of the asset, it will be \IDpoosibTeto determine such cost of acquisition. Nor can sub-section (3) of

.ection 55 be nvoked, because the date of acquisition by the previous owner will remain unknown. [945 F-G, H. 946 A]

A Commissioner of J, zcon1c-tax v. K. Rathnam Nadar, (1969) 71 I.T.R. 433- (Mad.); Conunissioner of Income-tax v. Chunilal Prabhudas & Co., (1970) 76 l.T.R. 566 (Cal.); Jagdev Su1gh A1unuCk v.

Comnlissioner oj Income-tax,

(1971) 81 I.T.R. 500 (Delhi); Commissioner of Income-tax v. E.

Jacob,

(1973) 89 I.T.R. 88 (Kerala): con1missioner of Income-tax v. Honie IndustrfeJ & Co., (1977) 107 l.T.R. 609 (Born.); Commissioner of Income-tax v. Michel Postal, (1978) 112 I.T.R. 315 (Born.); Commissioner of Income-tax v. Jaswant B Lal Dayabhai, (1978) 114 J.T.R. 798 (M.P.) approved.

Conunissioner of !11con1c-ta.l. v. Mohanbha1 Pamablzai, (1978) 91 I.T.R. 393 (Guj.); K. N. Daftary v. Conunissioner of !11con1e-tax (1977) 106 I.T.R. 998, overruled. c CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1146 of 1975,

Appeal by Special Leave from the Judgment and order dated 4-7-1974 of the Karnataka High Court i'n l.T.R. No. 38/72.

CONNECTED WITH

Civil Appeal No. 1378 of 1976.

Appeal by Special Leave from the Judgment and Order dated 1-12-1975 of the Karnataka High Court in I.T.R.C. No, 32/74,

AND

Civil Appeal No. 926 of 1973.

E From the Judgment and Order dated 2-11-1972 of the Kera!a

High Court in Income Tax Reference No. 120/70.

C.A. No. 1146/75.

Soli J, Sorabjee, Addi. Sol. General, B. B. Ahuja and Miss A.

Subhashini for the Appellant.

T. A. Ramachandran, B. Partha Sarathi and Miss R. Vaigai for the Respondent.

K. K. Goswami, S. P. Mehta, Dinesh Vyas, P. H. Parkh, C. B.

Singh, Miss Vineeta Caprihan and B. L. Verma for the intervener.

C.A. No. 1378/76.

Soli J. Sorabjee, Addi- Sol. General, B. B. Ahuja and Subhashini for the Appellant.

Vineet Kumar and A. K. Srivastava for the Respondent.

C.A. No. 926/73.

Miss A.

V. S. Desai, K. C. Dua and Miss A. Subhashini for the Appellant. ..

A. S. Nambiar and P. P. Namboodiri for the Respondent,

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The Judgment of the Court was delivered by

PATHAK, J.-The question in these appeals is whether the transfer of the goodwill of a newly commenced business can give rise to a capital gain taxable under s. 45, Income Tax Act, 1961.

The assessee, a registered firm, mo nufactured and sold agarbattis.

Clause ( 13) gf the Instrument of Partnership executed on 28th July, 1954 showed that the goodwill of the firm had not been valued, and the valuation would be made ou dissolution of the partnership. The period of the partnership was extended by an instrument dated 31st

March, 1964, and it contained a similar clause (13). Subsequently, the assessee firm was dissolved by a deed dated 1st December, 1965.

At the time of disolution, it seems, the goodwill of the firm was valued at Rs. 1,50,000/-. A new partnership by the same name was constituted under an instrument dated 2nd December, 1965 and it took overall the assets, including the goodwill, and liabilities of the dissolved firm.

The Income-Tax Officer made an assessment on the dissolved firm for the assessment year 1966-67 but did not include any amount on account of the gain arising on transfer of the goodwill.

The Commissioner, being of the view that the assessment order was prejudicial

to the Revenue, decided to invoke his revisional jurisdiction and setting aside the assessment order directed the Income-Tax Officer to make E a fresh assessment after taking into account the capital gain arising on the sale of the goodwill.

In appeal before the Income Tax Appellate Tribunal, the assessee maintained that the sale did not attract tax on capital gains nnder s. 45 of the Income-Tax Act, 1961. Accepting the contention, the p Tribunal allowed the appeal.

At the instance of the Commissioner of Income-Tax it referred a question of law to the High Court of Karnataka which, as reframed by the High Court, reads as follows

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no capital gains can arise under s. 45 of the Income Tax Act, 1961 on the G traasfer by the assessee firm of its goodwill to the newly constituted firm ?"

By its judgment dated 4th July, 1974 the High Court answered the question in the affirmative, holding that the value of the consideration received by the assessee for the transfer of its goodwill was not liable H to capital gains tax under s. 45 of the Act. Civil Appeal No. 1146 of 1975 is directed against that judgment.

Civil Appeal No. 1378 of 1976 arises out of a judgment by !he same High Qmrt in which it has followed its earlier view.

Civil Appeal No. 926 of 1973 has been preferred against tl1e judgment of the Kerala High Court where a similar opinion has been expressed, but in respect of the provisions of s. 12-B, Indian Income Tax Act, 1922.

At the relevant time s. 45, Income Tax Act, 1961 provided :

"45.(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53 and 54, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place."

The section operates if there is a transfer of a capital asset giving rise to a profit or gain. _ The expression "capital asset" is defined in s. 2 (14) to mean "property of any kind held by an assessee". It is of the widest amplitude, and apparently covers all kinds of property except the property expressly excluded by clauses (i) to (iv) of the sub-section which, it will be seen, do not include goodwill. But the definitions in s. 2 are subject to an overall restrictive clause. That is expressed in the opening words of the section : "unless the context otherwise requires".

We must therefore enquire whether contextually s. 45, in which the expression "capital asset" is used, excludes goodwi!l.

Goodwill denotes the benefit arising from connection and reputation.

The original definition by Lord Eldon in Cruttwell v. Lye(') that goodwill was nothing more than "the probability that the old customers would resort to the old places" was expanded by Wood V. C. in Churton_ v. Douglas(') to encompass every positive advantage "that has been acquired by the old firm in carrying on its business, whether connected with the premises in which the business was previously carried on or with the name of the old firm, or with any other matter carrying with it the benefit of the business".

In Trego v. Hunt(') Lord Herschell described goodwill as a connection which tended to become permanent because of habit or otherwise. The benefit to the business varies with the nature of the busine.ss and also from one business to another. No business commenced for the first time possesses ------

(1) 1810 17 Yes 335.

(2) 1859 John 174.

(3) 1896 A.C. 7.

• '

• '

goodwill from the start. It is generated as the business is carried on and may be augmented with the passage of time.

Lawson in hiS "Introduction to the Law of Property'' describes it as property of a highly peculiar kind.

In Commissioner of Income-tax, West Bengal Ill v. Chunilal Prabhudas & Co.,(') the Calcutta]ligh Court reviewed the different approaches to the concept :

"It has been horticulturally and botanically viewed as "a seed sprouting" or an "acorn growing into the mighty oak of goodwill". It has been geographically described by locality.

It has been historically described by locality.

It has been historically explained as growing and crytallising traditions in the business. It has been described in terms of a magnet as the "attracting force". In terms of comparative dynamics, goodwill has been described as the "differentfail return of profit".

Philosophically it has been held to be intangible.

Though immaterial, it is materially valued.

Physically and psychologically, it is a "habit" and sociologically it is a "custom". Biologically, it has been described as Lord Macnaghten in Trego v. Hunt as the "sap and life" of the business. Architecturally, it has been described as the "cement" binding together the business and its assets as a whole and a going and developing concern."

A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business,. another may dominate in another business. Amd yet because of its intangible nature, it remains insubstantial in form and nebulous in character.

Those features prompted Lord Macnaghten to remark in Commissioner of Inland Revenue v. Muller & Co.'s Margarine Limited(') that although goodwill was easy to describe, it was nonetheless difficult to define.

In a progressing business goodwill tends to show progressive increase.

And in a failing business it may begin to wane. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introducton to old customers and agreed absence of competition. There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. It comes silently

(I) [1970] 76 J.T.R. 566.

(2) [1901] A.C. 217.

into the world, unheralded and unproclaimed and its impact may not be visibly felt for an undefined period.

Imperceptible at birth it exists enwrapped in a concept, growing or fluctuating with the numerous imponderables pouring into, and affecting, the business.

Undoubtedly, it is an asset of the business, but is it an asset contemplated by s. 45 ?

Section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax.

The asset must be one which falls within the contemplation of the section. It must bear that quality which brings s. 45 into play. To determine whether the goodwill of a new business is such an asset, it is permissible, as we shall presently show, to refer to certain other sections of the head, "Capital gains".

Section 45 is a charging section.

For the purpose of imposing the cbarge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chmgeable profits and gains. All transactions encompassed by s. 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be 11pplied must be regarded as ncYer intended by s. 45 to be the subject of the cbarge.

This inference flows from the general arrangement of the provisions in the Income-tax Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge.

The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions pertaining to each head of income. No doubt there is a qualimtive difference between the charging provision and a computation provision.

And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head.

• '

The point to consider then is whether if the expression "asstt" in \ s. 45 is construed as including the goodwill of a new business, it is

• -

•- -

1== - J ii

possible to apply the computation sections for quantifying the profits A and gains on its transfer.

The mode of computation and deductions set forth in >. 48 provide the principal basis for quantifying the income chargeable under the head "Capital gains".

The section provides that the income chargeable under that had shall be computed by deducting from the full value B of the consideration received or accruing as a result of the transfer of the capital asset :

"(ii) the cost of acquisition of the capital asset ...... "

What is contemplated i~ an asset in the acquisition of which 1! " possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being av-ailable on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class it may, on the facts of a certain case, be acquired without the payment of money. That kind of case is covered by s. 49 and its cost, for the purpose of s. 48 is dctedmined in accordance with those provisions..

There are other provisions which indicate that s. 48 is concerned with an asset capable of acquisition at the cost. S. 50 is one such provision. So also is sub-section (2) of s.55. None of the provisions pertaining to the head "Capital gairis" suggests that they include an asset in the acquisition of which no cost at afl can be conceived. Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before, it

is apparent that the goodwill generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain.

In the case of goodwill generated in a new business there is the further circumstance that it is not possible to detennine the date when it comes into existence. The date of acquisition of the asset is a. material factor in applying the computation provisions pertaining to capital gains. It is possible to say that the "cost of acquisition" mentioned in s. 48 implies a d1te of acquisition, and that inference is strengthened by the provisions of ss. 49 and 50 as well as sub-section (2) of s.55.

It may also be noted that if the goodwill generated in a new busine!! is regarded as acquired at a cost and subsequently passes to an assessec in any of the modes specified in sub-section ( 1) of s. 49, it will become necessary to determine the cost of acquisition to the provious

owner.

Having regard to the nature of the aseet, it will be impossible Il-214 SCl/81

'946 'llPREME COURT REPORTS

[1981] 2 S.C.R. _

A tn dc<crmine such cost of acquisition. Nor can sub-section (3) of s. 55

bl' invoked, because the date of acquisition by the previous owner will remain unknown.

We arc of opinion that the goodwill generated in a newly commenced business cannot be described as an ""asset" within the terms of s. "45 and therefore its transfer is not subject to income-tax under the head "Capital gains".

The question which has been raised before us, has been considered by some High Courts, and it awears that there is a conflict of opinion.

The Madras High Court in Commissioner of Income-tax v. K. Rathnam Nadar( 1), the Calcutta High Court in Commissioner of Income-tax v.

Chunilal Prabhudas & Co., (supra) the Delhi High Court in Jagdev Singh Mumick v. Commissioner of Income-tax('), the Kerala High Court in Commissioner of Income-tax v. E. C. Jacob('), the Bombay High Court in the Commissioner of Income-tax v. Home Industries & Co.(4) and Commissioner of Income-tax v. Michel Postal(•) and the Madhya Pradesh High Court in Commissioner of Income-tax v. Jaswant Lal Dayabhai(6 ) have taken the view that the receipt on the transfer of goodwill generated in a busiuess is not subject to income-tax as a capital gain. On the other side lies the view taken by the Gujarat High Court in Commissioner of Income-tax v. Mohanbhai Pamabhai(7 ) and the Calcutta High Court in K. N. Daftary v. Commissioner of Incometax(8) that even if no cost is incurred in building up the goodwill of the business, it is nevertheless a capital asset for the purpose of capital gains, and the cost of acquisition being nil the entire runount of sale proceeds relating to the goodwill must be brought to tax under the head "Capital gains". It is apparent that the preponderance of judicial opinion favours the view that the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purposes of income-tax.

Upon the aforesaid considerations, Civil Appeal No. 1146(T) of 1975 and Civil Appeal No. 1378 of 1976 must be dismissed.

(1) [19691 71 J.T.R. 433.

(2) [1971] 81 J.T.R. 500.

(3) [1973] 89 J.T.R. 88. •

(4) [19771 107 J.T.R. 609.

(5) [19781 112 I.T.R. 315

(6} [1978] 114 J.T.R. 798.

(7) [19781 91 J.T.R. 393.

(8) [1977] 106 J.T.R. 998.

J •

Civil Appeal No. 926 of 1973 raises the same question with refe- A rence to s. 12B, lndian Income Tax Act, 1922. As the relevant statutory provisions of the Indian Income Tax Act, 1922 are substantially similar to the corresponding provisions of the Income Tax Act, 1961, that appeal is also liable to be dismissed.

Accordingly, the appeals are dismissed with costs.

S.R.

Appeals dim1isscd.

B. C. SRINIVASA SETTY, ETC. ETC

February 19, 1981

P. N. BHAGWATI

V. D. TuLZAPURKAR

R. S. PATHAK, JJ.

section 45

31st March, 1964

31st December, 1965

Income Tax Appellate Tribunal

section 45

Income Tax Act, 1961

High Court o~ Karnataka

section 45

section 45

Section 45

section 2

Section 45

section 48

Section 48

section 48

sections 49, 50

section 55

section 49

Soli J, Sorabjee

B. B. Ahuja

A.

Subhashini

T. A. Ramachandran

B. Partha Sarathi

R. Vaigai

K. K. Goswami

S. P. Mehta

Dinesh Vyas

P. H. Parkh

C. B.

Singh

Vineeta Caprihan

B. L. Verma

Soli J. Sorabjee

Subhashini

Vineet Kumar

A. K. Srivastava

A.

V. S. Desai

K. C. Dua

A. Subhashini

A. S. Nambiar

P. P. Namboodiri

PATHAK

s. 45

Income Tax Act, 1961

31st

March, 1964

1st December, 1965

s. 45

Income-Tax Act, 1961

High Court of Karnataka

s. 45

Income Tax Act, 1961

4th July, 1974

s. 45

Kerala High Court

s. 12

Indian Income Tax Act, 1922

s. 45

Income Tax Act, 1961

sections 53 and 54

s. 2

s. 2

s. 45

Eldon

Herschell

Calcutta]ligh Court

Macnaghten

s. 45

Section 45

s. 45

Section 45

Parliament

s. 45

s. 45

Income-tax Act

s. 45

s. 49

s. 48

s. 48

S. 50

s. 48

ss. 49 and 50

s. 49

s. 55

Madras High Court

Bombay High Court

Madhya Pradesh High Court

Gujarat High Court

Calcutta High Court

s. 12B

Income Tax Act, 1922

Income Tax Act, 1961


EXPRESS NEWSPAPERS LTD.

THE STATE OF MADRAS

February 19, 1981

[A. D. KosHAL AND R. B. MISRA, JJ.]

Constitutiou of India-Article 133(l)(a) and (c) (before (lf/lendn1en1l Certificate issutd, not in confonnity with law-Supreme Court, if could revokethe cenificate-Special leave, if could be rranted after revoking the certificate.

1. If the certificate granted by the Court under sub-clauses (a) and (c) of clause (1) of Article 133 of the Constitution, as it then stood, did not cooform to leg:al requirements in as much as it did not specify the substantial question of law wkich, accordin~ to High Court, required determination and no reasons ig

respect of ssuance of the certificate appeared therein, the certificate could be revoked. [948 HJ

D Sohan Lal Naraindas v. Laxn?idas Raghunat/1 Gadit [19711 1 S.C.C. 276; Sardar B11hadur S. Indra Singh Trust v. Conunissioner of Inconie Tax, /Jengal [1972] I S.C.R. 392 followed.

2. In such a situation if it could be made out that a substantial question of law really required determination, this Court could treat the appeal as one by special leave after condoning the delay. In the instant case no such question is E' involved at all and, therefore, special leave cannot be granted.

[949 B-C]

CIVIL APPELLATE JURISDJCTION : Civil Appeal No. 322 of 1970.

From the Judgment and Decree dated 25-3-1969 of the Madras High Court in Appeal No. 1195of1970.

U. R. Lalit, P. H. Parekh and Miss Ma11ik Tarkunde for the Appellant.

The Judgment of the Court was delivered by

KosHAL J.

A preliminary objection bas been raised by Mr.

Rangam to the effect that the certificate granted by the court under G sub-clauses (a) and (c) of clause (1) of Article 133 of the Constitution of India, as it then stood, does not conform to legal requirements inasmuch as-

(a) it does not specify the substantial question of law which the High Court states require determination; and

(b) no reasons in •upport ol the issu11.nco of th~ certified~

appoar tbocoilt.

' •

EXPRESS NEWSPAPERS v. MADRAS (Koshal, !.) 949

The preliminary objection is well fonnded in view of the decisions A of this Court in Sohan Lal Naraindas v. Laxmidas Raghunath Gadit(') and in Sardar Bahadur S. Indra Singh Trust v.

Commissioner of Income Tax, Bengal(').

Faced with this situation Mr. Lalit wanted us tO' treat the appeal as one by special leave and prayed that such leave be granted now afterl B condoning the delay.

That would have been certainly a reasonable course to follow if it was made out that a substantial question of law really requires determination.

We have gone through the impugned judgment and find that no such question is involved at all.

We, therefore, refuse special leave, revoke the certificate granted by the High Court and dismiss the appeal but with no order as to costs.

P.B.R.

(I) [1971] l S; C.C. 276.

(2) [1972] 1 S.C.R. 392.

Appeal dismissed.

EXPRESS NEWSPAPERS LTD

THE STATE OF MADRAS

February 19, 1981

A. D. KosHAL

R. B. MISRA, JJ.

Article 133(l)(a)

Article 133

Madras High Court

U. R. Lalit

P. H. Parekh

Ma11ik Tarkunde

KosHAL

Rangam

Article 133

Constitution of India

Lalit

[1972] 1 S.C.R. 392


SRI SRI KALIMATA THAJ(URANI & SRI SRI RAGHUNATH

JEW & ORS. ETC. v.

UNION OF INDIA & ORS.

February 20, 1981

[S. MURTAZA FAZAL ALI AND A. VARADARAJAN, JJ.]

West Bengal Land Refornzs Act, 1955, S. 2(8) Proviso and Explanation, S. 20B(3), (4) and (5); West Bengal Land Reforms (Amendment) Act, 1972 &

U'e.H Bengal Land Reforms (Ame11dn11ent) Ac1, 1977-Constitutional validity of. ~

Constitution of India, 1950, Articles 14, 19(l)(e), (g) and Nimh Schedule Entry Nos. 60 and 81-Violation of Fundamental Rights-Complaint of-Court . to determine whether restrictions contain quality of reasonableness.

The West Bengal Land Reforms Act, 1955 permitted a tenant (land-holder} to get the land cultivated by a bargadar, on the basis that the bargadar would D share the produce, and the Act contained provisions for enforcement of the right of the tenant to get such share. Section 17 permitted the tenant to terminate the cultivation of the land by a bargadar and resume possession for his own cultivation on certain contingencies, one of them being that he requires it bona fide for personal cultivation.

The West Bengal Land Reforms (Amendment) Act, 1972 provided for the E reduction in tho ceiling area of the tenant, and incorporated sub-sections (3), (4) and (5) of section 20B of the 1955 Act, which provided that where the bargadar had voluntarily surrendered or abandoned the cultiYation of the land, the facility of cultivating the land personally by the tenant should be denied to him.

The West Bengal Land Reforms (Amendment) Act 1977 inserted a Provis<> and an Explanation to clause (8) of section 2 of the 1955 Act, which provided P that a person or member of his family should reside in the greater part of the

year in the locality where the land is situated and the principal source of his in- \ come is derived from the land and that 'family' shall have the same meaning as •- in clause (c) of section 14.

The petitioners in their writ petitions to this Cou1t assailed : ( 1) The West Bengal Land Reforms Act, 1955 as also amendments made to the said Act uptO' 1977, contending that the 1955 Act \Vas constitutionally invalid and that the Amendment Act of 1972 was in the nature of a Ceiling Act prescribing a particular ceiling for the area of the land which should be retained by the tenant and that sub-sections (3), (4) and (5) of s. 20B of the 1955 Act were violative of Article 14 of the Constitution, as being discriminatory and arbitrary Once the tenant was given the right of personal cultivation and was permitted to get the land cultivated by a bargadar on the basis. that the bargadar would share the produce, there was no warrant for not allowing the tenant to resume the land where a bargadar had voluntarily surrendered or abandoned the land and to deny the right of cultivating the land personally by the tenant, and (2) the Provis<>

KALIMATA THAKURANI v. UNION 951

and the Explanation to section 2 of the 1955 Act deprive the petitioners of their A rights guaranteed under Article 19(1) (e) and (g) of the Constitution in as much as it prevents them from either going to or residing in any other place in India and places a serious curb on their right to carry on an occupation other than agriculture.

On behalf of the respondents it was submitted that the rigour of sub-sections

(3) and (4) can be softened if clause (d) of section 17 is read down and inter- B preted in a way as to permit a tenant to resume the land under clause (d) of section 17 if the bargadar voluntarily surrenders or abandons the land.

Dis.missing the writ petitions :

HELD: l(i). The West Bengal Land Reforms Act, 1955 including the Amendment Act of 1972 and the proviso introduced by the Amendment Act of C 1977 are constitutionally valid. [961 G]

In the instant case the 1955 Act and the Amendment Act of 1972 having been added to the Ninth Schedule as Entry Nos. 60 and 81 prior to April 24, 1973, are immune fron1 challenge as being violative of Part III of the Constitution. [954 Al

Waman Rao & Ors. v. Union of India & Ors., AIR 1981 SC 271, referred to. 0

(ii) Clauses (a), (b) and (c) of sub-section (1) of section 17 of the 1955 Act are the only grounds on which a tenant can get the land back for his per~ sonal cultivation.

The -'Piltingency where the bargadar voluntarily surrenders or abandons the land is neither mentioned, nor directly or indireCtly contemplated by them.

The contention of the respondent cannot be accepted for it would introduce something into section 17 \Vhich is not there and this is diametrically E opposed to the well-known canons of interpretation. [956 D-E)

(iii) There is no logical justification for the provisions of sub-sections (3) and

(4) of section 20B. When once the cultivator chooses to bring a bargadar on the ]and the interest of the bargadar is protected and has been made heritable.

But when the bargadar on his own volition surrenders or abandons the land~ there is no reason why the tenant should not be allowed to resume cultivation and p instead be compelled to get the land cultivated by some other person nominated by the authority concerned under section 49 of the 1955 Act.

This provision, therefore, appears to be extremely harsh and works serious injustice to the rights of the tenants particularly after the ceiling area of the tenant has been considerably reduced by the Amendment Act of 1972. [956 F-G]

(iv) Though the provisions of sub-sections (3), (4) and (5) of section 20B G perilously border on arbitrariness and a-mount to serious curbs on the fundamental right of the cultivator to pursue his occuption, they cannot be struck down because thev are contained in the Amendment Act of 1972 which has been placed in th~ Ninth Schedule prior to April 24, 1973. It will, however, be for the legislature which is the best judge of the needs of its people to give, a suitable relief to the tenant and soften the rigours of these harsh provisions. [957 C-Dl H

(2)_ The object of the proviso is to safegu&rd the interest of the tenant himself S•.1 that he may give wholehearted attention to the personal cultivation of

the land.

The proviso does not debar him from following any other occupation but once a tenant wants to have the land to himself for personal cultivation he must elect whether to pursue the profession of cultivation or some other occupation. Thus, even though there is some amount of restriction both on the right of the petitioners to reside or follow any other occupation, such a restriction cannot be said to be arbitrary or unreasonable. [958 C, E-Fl

In the instant case the restriction does not amount to complete deprivation of the right of the tenant to reside elsewhere' because the words 'for the greater part of the year' leave sufficient scope to the tenant to residei elsewhere for a part of the year if he so desires.

It is not necessary that the. tenant should himself reside in the viilage for the greater part of the year.

It is sufficient if any member of the family which includes his wife, unmarried adult, married adult, minor son and so on remains in the village.

This would amount to substantial compliance of the conditions of the proviso. The restriction, therefore, is partial and in public interest.

[958 G, 959 DJ

(3) Whenever a complaint of violation of fundamental rights is made the Court has to determine hether or not the restrictions imposed contain the quality of reasonableness.

In assessing these factors a doctrinaire approach should nut be made but the essential facts and realities of life have to be duly considered. Our Constitution aims at building up a socialist state and the cstabiishment of an egalitarian society and if reasonable restrictions are placed on the fundamental rights in public interest, they can be fully justified in law.

[959 F-G]

State o! A1adra~ v. Jr. G. Row, [1952] SCR 597, referred to.

E ( 4) As the proviso operates equally to all the tenants governed by it no

question of discrimination arises. ·[961 F]

ORIGINAL JURISDICTION: Writ Petition Nos. 1345, 1635/79, 458,

935. 1418 and 1692/80.

Under Article 32 of the Constitution.

Sukumar Ghosh for the Petitioners in WP No. 1345/79.

S. N. Kacker, Govinda Mukhoty and Rathin Das for the Respondent in WP No. 1345/79.

P. Keshva Pillai for the Petitioner in WP No. 1635/79.

Rathin Das for Respondent No. 2 and Ors. In WP No. 1635/79.

Bimal Kumar Datta, Mrs. L. Arvind and A. K. Sen Gupta for the Petitioner in WP No. 458/80.

S. N. Kacker and Rathin Das for Respondent No. 2 and Ors. in WP No. 458/80.

S. C. Majumdar, Bimal Kumar Datta, Mrs. L. Arvind and A. K.

Sen for the Petitioner in WP No. 935/80.

KAL!MATA THAKURANI v. UNION (Fazal Ali, J.) 953

Sripal Singh for the Petitioners in WP No. 1418 of 1980 and A ,1692/80.

Rathin Das !or Respondent Nos. 2 and Ors. in WP Nos. 935, 1418 & 1692/80.

The Judgment of the Court was delivered by

FAZAL

ALI, J.

These petitions under Article 32 of the Constitution have been filed in order to challenge the vires of the West Bengal Land Reforms Act, 1955 (hereinafter referred to as the '1955 Act' j as also various amendments made to the said Act upto 1977.

The first plank of argument related to the constitutional validity of the 1955 Act.

The second plank of argument was confined to the validity . of the West Bengal Land Reforms (Amendment) Act, 1972 (hereinafter referred to as the 'Amendment Act of 19720 which was in the nature of a ceilhig Act prescribing a particular ceiling of the area of land which,, sould be retained by the tenant.

So fur as the Ceiling Act, viz., the Amendment Act of 1972 is concerned, it is conceded by the counsel for the petitioners that the constitutional validity of the aforesaid Act is clearly concluded by a recent decision of this Court in Waman Rao & Ors. v. Union of India & Ors.(1) where a Constitution Bench of this Court rejected the various grounds of challenge in respect of the constitutionality of various ceiling Acts passed by the. States concerned.

In view of this decision the learned counsel for the petitioners was fair enough to state that he does not want to press his contention regarding the constitutional validity of the Ceiling Act.

Similarly, tho learned counsel for the petitioners fairly conceded that as the 1955 Act, alongwith its amendments upto 1972, has been placed in the Ninth Schedule of the Constitution, it was immune from challenge and was saved by the protective umbrella contained in Art. 3 lB of the Constitution. In this cQrulection, this position was made absolutely cl.ear in Wanum Rao's case (supra) where this Conrt observed as

follcw~ :

"Thus, in so far as the validity of Article 3 lB read with the Ninth Schedule is concerned, we hold that all Acts and Regulations included in the Ninth Schedule prior to April 24, 197 3 will receive the full protection of Article 3 lB. Those laws and regulatians will not be open to challenge on the ground that they are inconsistent with or take away or abridge any of the rights conferred by any of the provisions of Part III of the Constitution."

(l) AIR 1981 SC 271

In the instant case, it is clear that the 1955 Act as also the Amendment Act of 1972 were added to the Ninth Schedule, being entry Nos. 60 and 81, prior to April 24, 1973.

In these circumstances, it is manifest that the aforesaid Acts arc completely immune from challenge on the ground that they are violative of any of the rights enshrined in Part III of the Constitution.

The learned counsel for the petitioners, therefore, was fully justified in making the concession before us.

The argument of the learned counsel for the petitioners in

W.P.

No. 1345 of 1979, which has been adopted by the counsel for the petitioners appearing in other petitions, centres round the validity of-

(1) The West Bengal Land Reforms (Amendment) Act, 1977 (published in the Gazette Extraordinary on 3-2-1978), and (2) Section 20B, sub-sections (3), ( 4) and ( 5), of the 1955 Act.

So far as the challenge to the constitutional validity of this section was concerned, it was confined only on the ground that the said sub-sections were violative of Art. 14 of the Constitution of India as being discriminatory and arbitrary.

It was contended that once the land holder, viz., the tenant was given the right of personal cultivation and was permitted to get the land cultivated by a Bargadar on the basis that the bargadar would share half the produce, there was no warrant for not allowing the tenant to resume the land where the bargadar had voluntarily surrendered or abandoned the land.

In order to consider this argument, it may be necessary to examine the status of the bargadar under the 1955 Act.

Section 2(2) defines bargadar thus:

"'Bargadar' means a person who under the system generally known as adhi, barga or bhag cultivates the land of another person on condition of delivering a share of the produce of such land to that person and includes person who under the system generally known as kisani cultivtes the land of another person on condition of receiving a share of the produce of such land from that person."

Section 16 of the 1955 Act provides that where the tenant brings in a bargadar on the land, the produce of the land may be shared in the proportion of 50 : 50 or 75: 25.

There are also provisions in the 1955 Act for enforcement of the right of the tenant to get his share of the produce from the bargadar which have not been challenged before us.

It would be seen that s. 17 permits the cultivator to terminate the cultivation of the land by a bargadar and resume possession under his own cultivation if the conditions mentioned in clauses

(a), (b) and (d) of sub-section (1) of s. 17 are satisfied.

Clause A<

(d) may be extracted thus :-

"That the person owning the land requires it bona-fide for bringing it under personal cultivation."

Thus, the cultivator has a right to get back the land for personal cultivation if he requires it for his bona fide use and proves the same B' to the satisfaction of the authority appointed under s. 17 (1) .

It was argued by the counsel for the petitioners that on a parity of reasoning contained in s. 17, there was no reason why-where the bargadar had voluntarily surrendered or abandoned the land-the facility of cultivating the land personally by the tenant should be denied C to him.

Sub-sections (3), (4) and (5) of s. 20B of the 1955 Act run thus. :

''(3) If such oflicer or authority determines that the bargadar had not voluntarily surrendered or abandoned the cultivation of the land which was being cultivated by him as such and what he had been compelled by force or otherwise to surrender or abandon the cultivation of such land, such officer or authority shall restore the bargadar to the cultivation of the land, or where the bargadar is not available or is not willing to be restored to the cultivation of such land, the person whose land was so cultivated shall not resume personal cultivation Of the land but he may, with the permission of such officer or authority, get the land cultivated by any person, referred to in section 49, who is willing to cultivate the land as a bargadar.

( 4) If such ofliccr or authority determines that the bargadar had voluntarily surrendered or abandoned the cultivation of the land which was cultivated by him as such, the person whose land was being so cultivated shall not resume personal cultiv-ation of such land but he may, with the permission of such officer or authority, have the land cultivated by any person, referred to in section 49, who is willing to cultivate the land as a bargadar.

(5) Any contravention of the provisions of sub-section

(3) or sub-section (4) shall be an offence punishable with imprisonment for a term which may extend to six months,

o~ with fine which may extend to one thousand rupees, or with both."

Sub-sections (3) and ( 4) prescribe the procedure which is to be adopted where a bargadar voluntarily surrenders or abandons the

SUPREME CO\JRT REPORTS

(1981] 2 S.C.R.

cult!vation of the land.

Under these provisions, the tenant is not allowed to resume personal cultivation but has to get the land cultivated by some other person with the permission of the officer or authority concerned.

Realising the force of the argument, Mr. S. N. Kacker, appear ing for the State of West Bengal, with his usual persuasiveness submitteJ that sub-sections (3) and (4) are extremely harsh but the rigoms of these sub-sections can be softened if we read down s. 17(d) amt interpret it in such a way as to permit a tenant to resume the land under clause ( d) of s. 17 if the Bargadar voluntarily surrenders or abandons the land.

We are, however, unable to agree with this argument because it will amount not only to distorting and misinterpreting clause ( d) but also to causing serious violence to its plain language, which cannot be done.

It would appear that clauses (a), (b) and (c) of sub--section

(1) of s. 17 of the 1955 Act are the only grounds given on which a tenant can get the land back for his personal cultivation.

The contingency where the bargadar voluntarily surrenders or abandons the land is neither mentioned in clauses (a), (b) and (c) nor is directly or indirectly contemplated by them.

In these circumstances. if we accept the contention of Mr. Kacker it would amount to introducing something into s. 17 which is not there and this is diametrically opposed to the well-known canons of interpretation.

We are, however, constrained to observe that there does not appear to be any logical justification for the provisions of sub-sections

(3) and (4) of s. 20B.

It is understandable that when once the cultivator chooses to bring a bargadar on the land, the interest of the bargadar should be duly protected and has been made heritable.

So far, there can be no objection and such a course is in consonance with the object of the statute.

But when the Bargadar on his own volition surrenders G or abandons the land, there is no reason why the tenant should not be allowed to resume cultivation and instead be compelled to get the land cultivated by some other person nominated by the authority concerned under s. 49 of the 1955 Act.

This provision therefore appears to us to be extremely harsh and works serious injustice to the rights of the tenants particularly after the H ceiling area of the tenant has been considerably reduced by the Amendment Act of 1972.

Thus, the tenant having a small area guaranteed to him for his unit, he should have at least fuller and

more eft:cCve rights to get that area cultivated by him or even by a bargadar of his choice subject to resuming the same, if the bargadar surrenders or abandons the land.

The amendment doubtless recognisei; the right of the ownership of the tenant within the ceiling area

and yet to deny him the r; ght of resuming cu!tivation of the land from the bargadar inducted by him after the bargadar voluntarily surrenders or abandons the same and forcing or imposing someone else to cultivate the land on behalf of the tenant appears to be contrary to the very tenor and spirit which sections 17 and 20B of the 1955 Act seem to subserve. Unfortunately, however, though the provisions of sub-sections (3), (4) [and (5) of s. 20B, which is only

a. penal section] perilously border on arbitrariness and amounts to serious urbs on the fundamental right of the cultivator to pursue his occ •pation, we cannot however strike down these provlS!ons because they are contained in the Amendment Act of 1972 which has been placed in the Ninth Schedule prior to April 24, 1973, and therefore fall within the protective umbrella and are immune from challenge.

It will, however, be for the leg; slature which is the best judge of the needs of its people to give a suitable relief to the tenant and soften the rigours of the harsh provisions of sub-sections (3), ( 4) and ( 5) of s. 20B on the lines indicated by us.

With these observations, the arguments of the learned counsel for the petitioners on this ground are overruled.

We now come to the second plank of the argument which comprises the challenge to the proviso and the Explanation to s. 2 of the 1955 Act.

This provision having been brought into force after the

24th of April, 1973, falls beyond the ambit of Art. 31B and is not covered by the protective umbrella of that Article. In these circumstances, the challenge to the constitutionality of this provision could F be entertained by us. Mr. Kacker did not controvert this position.

The impugned proviso and the Explanation which were added to clause (8) of s. 2 by the West Bengal Land Reforms (Amendment) Act, 1977, may be extracted thus :-

"Provided that such person or member of his family G resides for the greater part of the year in the locality where the land is situated and the principal source of his income is produced from such land.

Explanation-The term "family" shall have the same meaning as in clause (c) of section 14K."

It wa~ submitted that the proviso insists that the cultivator or member of his family must reide in the locality where the land i&

958 SUPREl\tlE COURT REPOR1S [ J 98 l) 2 S.C.R.

situate for the greater part of the year and thus deprives the petitioners of their right guaranteed to them under Art. 19( 1) ( e) and

(g) o[ the Constitution inasmuch as :t compels the pct11ionc1 to reside in the vil'iagll and prevents the111 from either going to or residing in any other place in India. The second ground of challenge to the constitutionality of the proviso was that it places a serious curb on the right of the petitioners to carry on their occupation other than agriculture

As regards the first argument, we are unable to agree with the learned counsel because the object of the proviso is to safeguard the interest of the tenant himself so that he may give whole-hearted attention to the personal cultivation of the land which has been secured for him by virtue of a valuable piece of agrarian reform.

If the tenant is allowed to go out of the village and reside at other places then the benefit conferred by the 1955 Act cannot be fully utilised by the tenant and would frustrate the very purpose for which agrarian reforms are meant. Moreover, the land is given to the tenant as the tiller of the soil fundamentally for the reason that cultivation is his main source of sustenance as is mentioned in the proviso itselt.

If, therefore, the principal source of sustenance of the tenant is agriculture it would be futile for the tenant to say that be should be permitted to follow other avocations or occupations in the main which will defeat the very purpose for which the proviso has been enacted.

The proviso does not debar him from following any other occupation but once a tenant wants to have the land to himself for personal cultivation be must elect whether to pursue the profession of culiivation or some other occupation. Thus, even though there is some amount of restriction bo.tb on the right of the petitioners to reside or follow any other occupation, such a restriction cannot be said to be arbitrary or unreasonable. It is well settled that where a restriction is imposed by the legislature in public interest in order to advance a particular purpose or carry out the dominant ob.iect, such a restriction is undoubtedly a reasonable one within the meaning of clauses ( 4) and ( 5) of Art. 19 of the Constitution.

Moreover, in the instant cast, the restriction does not amount to complete deprivation of the right of the tenant to reside elsewhere because the words 'for the greater part of the year' leave sufficient scope to the tenant to reside elsewhere for a part of the year if be so desires.

Furthermore, the Explanation adopts the definition of "family" which is the same as defined in s. 14K of the 1955 Act which runs thus :

"(i) himself and his wife, minor sons, unmarried daughters, if any,

\; ALIMATA THAKURANI r. l!'>;!O~ (Fazal Ali, J.) 959

(ii) his unmarried adult son, if any, who does not hold any land as a raiyat,

(iii) his married adult son. if any, where neither such adult son nor the wife nor any minor son or unmarried daughter of such adult son holds any land as a raiyat,

(iv) widow of his predeceased son, if any, where neither such widow, nor any minor son or unmarried daughter of such widow holds any land as a raiyat,

(v) minor son or unmarried daughter, if any, of his predeceased son, where the widow of such predeceased son is dead any minor son or unmarried daughter of such prec deceased son does not hold any land as a raiyat,

but shall not include any other person."

Thus, it is not necessary that the tenant should himself reside in the village for the greater part of the year and it is sufficient if any member of the family which includes his wife, unmarried adult married adult, minor son and so on, remains in the village and this would amount to substantial compliance of the conditions of the proviso.

The restriction, therefore, is partial and in pnblic interest and bears 'a close nexus with the object of the 1955 Act, viz., to achieve agrarian

reforms.

The fundamental rights enshrined in Art 19 of the Constitution are not absolute and unqualified but are subject to reasonable restrictions which may be imposed under sub-clauses (4) and (5) of Art 19.

Whenever a complaint of violation of fundamental rights is made the Court has to determine whether or not the restrictions imposed contain the quality of reasonableness.

In assessing these factors a doctrinaire approach should not be made but the essential facts and realities of life have to be duly considered. Our Constitution aims at building up a socialist state and the establishment of an egalitarian society and if reasonable restrictions are placed on the fundamental rights in public interest, they can be fully justified in law.

Tue principles laying down the various tests of reasonablenes have been very aptly enunciated in the case of State of Madras v.

V. G, Row( 1) which is almost the locus classicus on the subject in question, In that case Shastri, C.J,, speaking for the Court observed as follows :-

"It is important in this test of reasonableness,

(I) [1952) S.C.R. 597 ..

context to bear in mind that the wherever prescribed, should be '

applied to each individual statute ; mpugned, and no abstract standard, or general pattern, of reasonableness can be laid down as applicable to all cases. The nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailing conditions at the time, should all enter into the judicial verdict."

The case has been consistently followed by later decisions of this.

Court right uptodate.

C Another important factor to consider the reasonableness of restrictions is if the restrictions imposed are excessive or dispreportionate l to the needs oi a particular situation.

Further, if the restrictions are in implementation of the directive principles of the Constitution the same would be upheld as being in public interest because the individual interest must:o yield to the interest of the community at large for only D then a welfare state can fiourish.

Applying these tests to the facts of the present case we are satisfied that the restrictions contained in the i1lJiPugned proviso cannot besaid to be unreasonable for the following reasons :

The dominant object of the proviso is to abolish 1he ageold institutions of absentee land-holders by insisting that the cultivator to whom land is allotted must give full and complete attention to the soil and as a result of which there will be a maximum utilisation of the agricultural resources which would increase production.

Under the Amendment Act of 1972 an adult unmarried person is entitled to hold an area up to 2.50 hectares which is equal to 6. 72 acres, a tenant with a family of two or more is entitled to hold 12.36 hectares and a tenant having a family of five or more is entitled to hold 7 hectares which is equal to 12.23 acres being the maximum area permissible. Thus, the area left to the tenant is quite vast and appreciable and if the tenant wants to bring this area under cultivation in right earnest it would hardly leave him time to quit the village and pursue other avocations of life.

It is obvious that the tenant has to remain in the village for the purpose of cultivating the lands, sowing the seeds, growing it and harvesting it.

These processes would doubtles11 require the presence of the tenant for a greater part of the year which i11 what the proviso predicates. If the

tenant is permitted to leave the village for more than half the year then the very purpose of giving such a vast area for cultivation to a tenant will be foiled.

Moreover, the proviso merely insists that the tenaut should remain in the village or its periphery for "greater part of the year" which appears to be not only reasonable but absolutely essential if the land has to be cultivated in a scientific manner in order to yield the maximum possible production, which would result in better and equitable distribution of agricultural products for the use of the people of the country.

Another aspect of the proviso is that the land is given to the tenant only if his main source of sustenance is from agriculture so

C ' that the land may be reserved only for the tiller of the soil and none else.

Hence, the restrictkms imposed, therefore, by the proviso are undoubtedly in public interest and in consonance with the concept of promoting and accelerating agrarian reforms which is the prime need of the hour.

For these reasons, therefore, the challenge that the proviso violates Art. 19(1) (e) and (g) must fail.

The last contention put forward by the petitioners was that the proviso is also violative of Art. 14 inasmuch as it is extremely arbitrary and discriminatory. We are unable to uphold the challenge on

the ground that the proviso violates Art. 14 because we do not find E any element of arbitrariness in the proviso. If the statute insists that the tiller of the soil must remain in the village for a greater part of the year in order to cultivate the land which has been given to him and thereby increase the produce of the land, no serious prejudice is caused to the tenant because that is the purpose for which he has himself secured the land. Secondly, as the proviso operates equally F to all the tenants governed by it no question of discrimination at all arises.

Thus, this argument also is wholly untenable and must fail.

For the reasons given above, we hold that both the Act of 1955, including the Amendment Act of 1972, and the proviso introduced G by the Amendment Act of 1977 are constitutionally valid.

As we have made certain observations regarding the harshness of the provisions of sub-sections (3), (4) and (5) of s. 20B of the 1955 Act, let a copy of this judgment be sent to the Hon'ble Chief Minister of West Bengal.

The petitions are dismissed without any order as to costs.

N.V.K.

14-214SCI/81 Petitions dismissed.

SRI SRI KALIMATA THAKURANI & SRI SRI RAGHUNATH JEW & ORS. ETC

UNION OF INDIA & ORS

S. MURTAZA FAZAL ALI

A. VARADARAJAN, JJ.

West Bengal Land Refornzs Act, 1955

S. 2(8)

S. 20B(3)

Land Reforms (Amendment) Act

Constitution of India

Articles 14, 19(l)(e)

West Bengal Land Reforms Act, 1955

Section 17

Land Reforms (Amendment) Act

section 20B

Land Reforms (Amendment) Act

section 2

section 14

West Bengal Land Reforms Act, 1955

s. 20B

Article 14

section 2

Article 19(1)

India

section 17

section 17

West Bengal Land Reforms Act, 1955

Act and the Amendment Act

Ninth Schedule

April 24, 1973

AIR 1981 SC 271

section 17

section 17

section 20B

section 49

section 20B

Ninth Schedule

Article 32

Sukumar Ghosh

S. N. Kacker

Govinda Mukhoty

Rathin Das

P. Keshva Pillai

Bimal Kumar Datta

L. Arvind

A. K. Sen Gupta

S. C. Majumdar

A. K.

Sen

Sripal Singh

Rathin Das

FAZAL

ALI

Article 32

Land Reforms (Amendment) Act

So fur as the Ceiling Act

Ninth Schedule

Art. 3

Wanum Rao

Article 3

Ninth Schedule

Ninth Schedule

April 24, 197 3

Article 3

AIR 1981 SC 271

Act as also the Amendment Act

Ninth Schedule

Land Reforms (Amendment) Act

Section 20B

Art. 14

Constitution of India

Section 2(2)

Section 16

s. 17

s. 17

s. 17

s. 17

s. 20B

section 49

section 49

S. N. Kacker

State of West Bengal

s. 17(d)

s. 17

s. 17

Kacker

s. 17

s. 20B

s. 49

sections 17 and 20B

s. 20B

Ninth Schedule

s. 20B

s. 2

24th of April, 1973

Art. 31B

s. 2

Land Reforms (Amendment) Act

section 14K

Art. 19( 1)

Art. 19

s. 14K

ALIMATA THAKURANI

Fazal Ali

Art 19

Art 19

Shastri

Art. 19(1)

Art. 14

Art. 14

s. 20B

West Bengal