952 SUPREME OOURT REPORTS [1962] &UPP.

:\IAHARAJ JAGAT BAHADUR SINGH

Mmch ~O. v.

BADRI PHASAD SETH

(S. K. DAS, :\I. HwaYATlJI.LAII and , J, C. SHAH, , JJ.)

llr.nt Control-Requiren11.nt of 1JO.SStss[o11 hy lan'l-lord for currying out repairs-Jl'hethet repairs can lu~ ejjectecl uithu11f evicting tenant-Pou:l'rs of the Hiyh Court i11rccision-f.:at l'u11jab Urban Rent l!estriclion Act, 1.94.9 (Hast l'unj. J of l!iJ9),

SS. JJ(J)(a), J; j(fi).

Appellant landlord applied to the Rent Controller for eviction of the Respondent tenant on l.12.56 under s. 13(3) of the Punjab Crban Rent Ilestriction 1\ct for rcn1edying certain defects in the based building. The Municipal Committee on 11.4.57 issued an an1cndcd notice requiring only that the cracked pillar be reinforced so as to rnake it a solid blo'ck.

Respondent carried out the repairs.

On June 8, 195i, the Executive Engineer inspected again in compliance 'vith the order of the Rent Controller and \\as satisf1ed that the pillar had been repaired satisfactorily. The Rent Co11trolltr held that the case fell withi11 s. 13(3j(a) of the Act at:d ordered eviction of the Respondent.

On appeal the District Jud); e taking note of the state of repairs allo\\ccl the appeal. 111 revision under s. 15(5) of the Act the High Court .Judge held that the po,, crs of the lligh Court in revision \Vere sin1ilar to those under s. 115 of the Civil Proccd111e Code and that there \\as no question of jurisdiction invo]vcd in 1hc case.

J le, ho, vevcr, affirmed the decision after considering the evidence.

Held, that the powers of the High Court under s. 15(5) of the Act 'vcre manifestly , vider than thOse under s. 115 of the Civil Procedure Co<lc an<l 'verc uot confined to questions of jurisdiction. That under s. 13(3)(a) the requirement of vacant possession by the landlord could only he for the purpose of carrying out such fundamental and extensive repairs as could not he carried out v.:ithout evicting the tcna11t and not for ininor repairs and that it was open to the.District Judge to consider the subsequent events upto the time \\'hen

eviction v:as ordered by the Controller in vi cw ef the .schcn1e and purpose of the legislation.

CIVIL APPELLATE J URISDIC'rrox : Ci vii A pp ea I No. 340 of 1959.

Appeal by special leave from the judgment

and order dated May 21, 1958, of the Punjab High Court iu Rgvision Application No. 27 of 1958.

M. 0. Setalvad, Attorney-General of India, S. N.

Andley, Rameshwar Nath and P. L. Vohra, for the appellant.

H. N. Sanyal, Additional Solicitor-General of lndia, and J. N. Shroff, for the respondent.

1962. March 20. The Judgment of the Court was delivered by

DAS, J.-This is an appeal by speci1tl leave from the judgment and order of a learned single Judge of the . .l:'unjab High Court dated }fay :H, 1958, in Civil ttevision application No. 27 of 1958 of that Court. By that order the learned single Judge dismissed an application in revision ma.de by the appellant herein in the following circumstances.

The appellant, ,1Jaharaj Jagat Bahadur Singh is the owner of the premises known as Ranzor Hall in Simla. The respondent, Badri Pras'.l<l Seth, is in occupation of the premises as a tenant and is running a cinema therein which is known as Hevoli theatre or Revoli cinema. 'l'he correspondence between the parties shows that on or about April 12, 1956 the Executive Engineer, SimhL Provincial Division, inspected the cinema building on behalf of the Licensing Authority, namely, Deputy Commissioner, Simla, and noted six defects, one of which was, to use the words of the Executive Engineer, "the right hand pillar of the screen has cracked and has gone out of plumb." The existence of these defects was communicated to the respondent and also to the Muncipal Committee, Simla. The respondent in his turn communicated. the existence of these defects to the appellant by a letter dated April 17, 1956. In that letter the respondent suggested to the appellant that. the defect in the pillar should be removed before the beginning of June, 1956, when the rains were likely to

M(Jharaj Jagat Bahadur Singh v.

Badri Prasad Seth

DasJ.

J:Jfj2

.\tahar<Jj Ja&at Bahadur Si, igh

Bad1i Prasad Seth

nas J.

commence. The respondent removed the other

tfofects whil'h wero of a minor nature; but £lcttin~ no reply from the appellant, he again wrote to him on September l i, 1956, and asked him to take early steps to repair the pillar to a void any mishap. The

nspo11dent also intimated to the appellant tha.t tho cost of repairs to the pillar was likely to be in the 11cighbourhood of Rs. 5000/-. The appellant took no actiun in tho matter for some time. On Septum ber 2'!, Hl56 the East Punjab Crban Rent Restri<:tiou Act, 19-!9 (East Punjab Act Xo. Ill of l!J4!J) (hereinafter referred to as the Act) was amended aud a elauso was inserted ins. 13(3)(a) thereof which entitled the landlord to apply to the Rent Controller for an order directiug the tenant to put the landlord in possession in the case of any building if he required it to carry out any building work at tho instance of the Government or local authority or any Improvement Trust under some improvement or development scheme or if the building had become unsafe or unfit for human habitation. On April

!I, 1956, the appellant wrote to the !:'resident, Simla :IIunicipa.l Committee, a.sking him to get the pillar in the Rauzor Hall inspected by the Executive Engineer in order to have his oprniou whether tho pillar was really iu a dangerous condition and required any action on the part of the )luniuipal Committee under s. llf, of the Punj1ib ~Iunieipal Act, l!Jll (Punjab Act III of 1911).

On Oetobtl!' :JO, 1956, the Secretary, i\[unicipal Committee, Simla, wrote to the respondent about tho defect in respect of the right hand pill1ir of the screen and required the respondent by means of a notice to do the repairs within fifteen days of the receipt of tho notice. The Secretary issued tho notice perponing to act under ss. 113 and .114 of the Punjab Municipal Act, 191 I. It appears that. the :IIunicipal Committee had the pillar inspected again in November, 1956, by the -Executive Engineer,

Simla Central Division. This time the Ex:ecntive Engineer suggested that the two end walls

(pillars) snpporting the beams for the screen were cracked aml therefore must be replaced by thicker walls. The Municipal Committee considered this "report and" came to the conclusion that as a precautionary measure what was necessary was to fill the doorway in the pillar with masonry so that the whole might become a solid block. On April 11, 1957, the Municipal Committee wrote to the appellant asking the latter to fill the doorway with masonry so that tbe whole pillar might become a solid block. This was in modification of the earlier notice wlrich had suggested more extensive repairs to the pillar. But before April 11, 1957, when the new notice from the Municipal Committee was received, the appellant had already made an application on December 1,1956, under s. 13 of the Act praying for an order from the Controller directing the re~ pondent to put the appellant in possession of the property on the ground that the appellant required the l:iuilding for replacing the end walls supporting the beams of the screen by thicker walls. This application was contested by the respondent mainly on the ground that the appellant's claim was not bona fide and that the appellant did not really require the building to be vacated for the purpose of making the repairs to the pillar in question.

The Rent Controller came to the conclusion that the case was fully covered by cl. (iii) of s.13 (3)(a) of the Act inasmuch as on the evidence on the record it was established that the appellant required the building: to carry out the necessary building work which the Municipal Committee, Simla, had directed to be done. There was an appeal from the order of the Rent Controller to the Distriet Judge who was the relevant appellate authority under s.15 of the Act. The learned District Judge came to the conclusion that the noticeA under ss. 113 and 114 of the Punjab Municipal

t! aharoj J agat Bahadur Singh

Badri Prasad Seth

Das J.

19G2

MaJ.arai .lotat /Jahad11r Sm.t:h . v.

B. d1i P1a;(ld Scih

Act., I!ll I, had been manipulated by the landlord after the amendment made in s. t:l of the Act on Scptrmbcr 24, 19:i6, and that the appellai1t did not bon11 fide require the building for carrying out

th~ repairs iil queRtion. The lcarnrd District. , Judge pomterl out that. on April 1 I, l B:ii the i\lunicipal Committee had asked the landlord to fill the dou1 - way with masonry so that the whole mi!!ht become

a solid block and though the )funicipal Comn:ittee

had modified its earlier requirement of thicker walls

by means of a notice after the filing of the appli0ation by the appellant, it was open to the Court to take into consideration facts which had come into cxistancc after the filing of the application. He also pointed out that the evidence oft.he Executive EnginAPI', Central P.W.D., showed that he inspecti>d the building on .Tune 8, I 957, in tho compliance with the directions of the Court and was satisfied that the pillar had been satisfactorily repaired.

In this view of the matter the learned District .Judge allowed the appeal and dismissed the application.

Thn, there was an application in revision under s. lii(•'i) of the Act to the High Court.

This application was dealt with by K. L. Gosain, .J. who wrongly prn?Ceded on the footing tat the appli.c~ tion in rev1s10n was one under s. ii:>, Code of C1v1l Procedure. Though the learned Judge said that he had "one through the evidence and agreed with the

findias arrived at by thn District Judge, he came

to tho 0 conclusion that as no question of jurisdiction was involved within the meaning of s.115, Cod!l of Civil Procedure, he saw no reasons to interfere and dismissed thn application in revision.

The present appeal is direct.id against this order of the learned smgle Judge.

Tho learned Attorney .General who appeared on behalf of the appellant has rightly pointed out that the learned J udgo of tho High Court was in

error in disposing of the case as though the application in revision made to the High Court was an application under s. 115, Code of Civil Procedure.

The application was really an application under s. 15(5) of the Act which is in these terms : ' "15. (5) The High Court may, at any time, on the application of any aggrieved party or on its own motion, call for and examine the records relating to any order passed or proceedings taken under this Act for the purpose of satisfying itself as to the legality or propriety of such order or proceedings and may pass such order in relation thereto as it may deem fit."

It is manifest that the scope of subs. ( 5) of s. 15 of the Act is not the same as the scope of s. 115, Code of Ci•il Procedure. The learned Attornev General has submitted. rightly in our opinion, that.the scope of sub-s. (5) of s. 15 of the Act is wider and is not confined to questions of jurisdiction only.

But even if the learned Jud!!; e of the High Coart was in error in treating the application as one under s. 115, Code of Civil Procedure, the fact still remains that he affirmed the findings of the learned District Judge and one of these findings was that the landlord did not require the building to carry out the repair work which was su?gested by the Municipal Committee. The Municipal Committee liad suggested a very simple work of repair, namely, filling up of the doorway in the pillar so that the pillar might be one solid wall to support the screen. It has not been seriously disputed before us that such repairs could be easily carried out without the necessity of asking the respondent to vacate the building. As a matter of fact the learned Dis trict Judge has pointed out that the Executive

Enginear, Central P.W.D. had, subsequent to the application, exfJ, mined the pillar and found thn, t

J96!t

,1-fah~, rof Jagat 8'Jlladur Singh ..

Bodri Prasad Seth

DasJ.

,\faharaj J •got B!lhJdur Singh ..

Bad1i Prasad Sttli

Das J.

the repair work had already been done by the respondent.

The leiirned Attorney General has contenrled that the lciirned District Judg<• was in error in holding that the appelliint had manipulat.ed the notices

..nclcr as. 11 :i am! 114 of the Punjab :lfonicipal Ant.

We think it unnece88ary to go into that qn<'stion

because the relevant provision in s. J::l(3)(a) of tho Act makes it quite clear that the landlord is m1tit.-

led to an order from the Controller directing the terant to put thP landlord in pos8ession rJf th<·

building only when the landlord requires it.to carry out any building work etc.

Tho relevant provision rpads as follows :

"13. (1) A tenant in posFession of a building or rented fan<l shat! not be t'Victed t he1 efrom x x x l'Xccpt in acco, dun' e with the prov is ions of' this section, x x x. (2) x x x.

(:l) (a) A landlord may apply to tlw Controller for an order directing the t<nant to put the landlord in posseo; ion-

(i) x x x (ii) x x x

(iii) in the ca8e of any building or renied land if he requires it to carry out. any buildi11g work at t.he in•t1mcc of the Government or local authority or any Jmpro\'(mcnt 'I'ru8t under Rome im)Jro\ement or clcvelopm., nt echem" or if it bas hecome unsafe or 1111fit for human babitat:on.

x x x. " W<.' emphasis£> the word "1cquires" in the provision. Having regard to the sehme and purpose of tbp. legislation it is abundantly clear that cl. (iii) of

' '

s.l3(3)(a) of the Act is attr.icted only when the building work is such that the lJ.ndlord requires that the building be vacated by the tenant in order to carry out the work ; in other words, the repairs needed are so extensive and fundamental in character that they cannot be carried out if the tenant remains in possesRion. Then only it can be said that the landlord requires the building to carry out the building work. We think that it is absurd to suggest that any such small work as white-washig, or filling up the gap in the doorway as in the present case, comes within cl. (iii) of s. 13(3)(a) of the

Act .

The learned Attorney General has argued that the learned District Judge wrongly took into consiqeration facts which had come into existance after the filing of the application under s.13 of the Act.

Here again we think that having regard to the scheme and purpose of the legislation it was open to the learned District Judge to take into consideration such facts as existed at the time when the order for vacation was to come into offer; t. Section 13 \ 3l(b) says that the Controller shall, if he is satisfied that the claim of the landlord is bona fide, make an C•rder directing the tenant to put the landlord in possession of the building on such date. as may be specified by the Controller. In the present case the Controller made the order in July, 1957, and directed the building to be vacated by Septem her 25, 1957. But long before that date, namely, on June 8, 1957, the Executive Engineer, Central P.W.D., had inspected the building and found that the pillar had been repaired satisfactorily. The Controller did not accept the testimony of the Executive Engineer and the learned District Judge pointed out that the testimony of the Executive Engineer had been rejected by the Controller on very insufficient grounds. Tt was open to the learned District Judge to take into consideration the testimony of the Executive Engineer and having regard

196!

Mahoraj Jagat

Baharlur Singh

Badri Prasad Seth

DasJ.

Mah1raj Joeat

Bahadur Smgti

Badri Pratad Stth

Dos J.

A1arch :?0,

960 SUPREME COURT REPORTS [1962] SllPl'.

to that testimony, the lcarne<l District Judge rightly came to the conclusion that cl. (iii) of s.1.1(:!)

(a) of the Act was not attracted to the Catie.

For these rea.sons we have com!i to the conclusion that there is no merit in the appeal whih

i~ accordingly dismissed with costs.

AppP, al dismissed.

K. M. S. REDDY, CO:\fi\HSST01\ER OF INCOME.

TAX, KERALA (CODIBATORE), EHNAKl1LA.Jl

THE WEST COAST CHEMICALS AND JN"DUS-

TIUES LTD. (I!\ LIQCIDATION"), ALLEPPX

(S. JC DAS, :VT. HrnAYATULLAH and .J.C. SHAH, .TJ.)

lncomr Tax-lri11dirig up of bu.sine . .; s-Rra[isation of

r1ssf:fs-~)'afe rlurin(f loinding up, if an l'lt;, t of lradi'tl'}-l'rofits an'si1; q out of sale--Lial1ili1y to lox.

The respondent cornpany \\as incorportrd in 1937 primarily with the object of acqnirini:r and \\orkinga match factorv.

Under the 1nr.morandun1 of as-; oc:iation the company \\as atso empo\\'Cred, inter a/ia, to rnanufacture and deal in chemicals. The business of rnanufa.cturing 1natches \\':lS carri<rl on hy the company till 1941.

Thercaf1cr thr. prr.•fits hccame less and less due to y,:ar conditions.

On ~1a.y 9, 19-lJ, the company rntere:d into an agreement with a third party for th~ sale of the land-.. buildings. plant ancl machinery of it~ match factory for Rs . .i,75,000.

It , vas agreed that this price \\'oulci not include manufacturrd roods, cttn1irab ancl CJtb<r 1a,,· 1naterials or any other asset not shown in the agrcment of

le. J.ater, a fresh a~TTce1nnt ,.., as entered into on .J\11g11.-.t 9,

19-13, under which the sale includeci chernical~ and paper for rnanufacture \vhich had not hecn sold in the first instance an<l the price \\'as Rs. 7,'.~5.000.

In a report to thr. sharcholdc:rs dated ..-\ugust l, 1944, the Direc.tof!C stated t!1at the price obtained had shown a capita) appreciation of about six tinH:>s the cost price and that the sale of chemicals harl resulle<l in substantial profit.

In proceedings for assessing income which had escaped a'isessment the incometax authorities, relying upon the memorandum of association \\"hic:h allowed the

IAHARAJ JAGAT BAHADUR SINGH

BADRI PHASAD SETH

S. K. DAS

C. SHAH, , JJ.

s. 13(3)

s. 13(3j(a)

s. 15(5)

s. 115

s. 15(5)

s. 115

s. 13(3)(a)

East Punjab Act

Punjab Act III of 1911

ss. 113

s. 13

ss. 113 and 114

s. 115

Code of Civil Procedure

s. 15(5)

s. 15

s. 115

s. 15

s. 115

Code of Civil Procedure

s. 13(3)(a)

Section 13


Mah1raj Joeat

Bahadur Smgti

Badri Pratad Stth

Dos J.

A1arch :?0,

960 SUPREME COURT REPORTS [1962] SllPl'.

to that testimony, the lcarne<l District Judge rightly came to the conclusion that cl. (iii) of s.1.1(:!)

(a) of the Act was not attracted to the Catie.

For these rea.sons we have com!i to the conclusion that there is no merit in the appeal whih

i~ accordingly dismissed with costs.

AppP, al dismissed.

K. M. S. REDDY, CO:\fi\HSST01\ER OF INCOME.

TAX, KERALA (CODIBATORE), EHNAKl1LA.Jl

THE WEST COAST CHEMICALS AND JN"DUS-

TIUES LTD. (I!\ LIQCIDATION"), ALLEPPX

(S. JC DAS, :VT. HrnAYATULLAH and .J.C. SHAH, .TJ.)

lncomr Tax-lri11dirig up of bu.sine . .; s-Rra[isation of

r1ssf:fs-~)'afe rlurin(f loinding up, if an l'lt;, t of lradi'tl'}-l'rofits an'si1; q out of sale--Lial1ili1y to lox.

The respondent cornpany \\as incorportrd in 1937 primarily with the object of acqnirini:r and \\orkinga match factorv.

Under the 1nr.morandun1 of as-; oc:iation the company \\as atso empo\\'Cred, inter a/ia, to rnanufacture and deal in chemicals. The business of rnanufa.cturing 1natches \\':lS carri<rl on hy the company till 1941.

Thercaf1cr thr. prr.•fits hccame less and less due to y,:ar conditions.

On ~1a.y 9, 19-lJ, the company rntere:d into an agreement with a third party for th~ sale of the land-.. buildings. plant ancl machinery of it~ match factory for Rs . .i,75,000.

It , vas agreed that this price \\'oulci not include manufacturrd roods, cttn1irab ancl CJtb<r 1a,,· 1naterials or any other asset not shown in the agrcment of

le. J.ater, a fresh a~TTce1nnt ,.., as entered into on .J\11g11.-.t 9,

19-13, under which the sale includeci chernical~ and paper for rnanufacture \vhich had not hecn sold in the first instance an<l the price \\'as Rs. 7,'.~5.000.

In a report to thr. sharcholdc:rs dated ..-\ugust l, 1944, the Direc.tof!C stated t!1at the price obtained had shown a capita) appreciation of about six tinH:>s the cost price and that the sale of chemicals harl resulle<l in substantial profit.

In proceedings for assessing income which had escaped a'isessment the incometax authorities, relying upon the memorandum of association \\"hic:h allowed the

colnpany to manufacture and sell chemicals and on the Directors' report, held that the profit from the sale of the chemicals and other raw materials was liable to income-tax on a profit of Rs. 2,00,000 which wu reduced later to Rs. !, 15,259.

The company claimed that the stock of raw materials was sold not in the course of ordinary trading but only in a realisation sale after th~ company had qeen wound up. The evidence showed that the clause in the memorandum of association giving power to the company to sell chemicals was seldem used and that prior to the sale of chemicals to the purchaser, two. transactions of sale of chemicals for small alnonnts in 1943 were too petty in themselves to afford

ei<lence of trading in chemicals.

• Held, that though under the second agreement dated August 9, 1943, more price was paid, the transaction was still a winding up sale and no part of this slump price was identifiahle as the price of the chemicals and other raw materials .

There was no eVidence. that before the winding 1up the company had sold chemicals as part of its business, and the two instances cited were too petty in them:5elves to afford evidence of a continued or sustained trading in chemicals.

A winding up salf" is not "trading or doing business" and the sale of the raw materials including the chemicals was not part of any busine!'; s done.

Accordingly, the sum of Rs. 1, 15,259 was not liable to tax.

Dou.ghly v Commi8sioner of Taxes, (1927) A. C. 327, discussed and relied on.

Case Jaw revie\ved.

CrvrL APPELLATE .JURISDICTION: Civil Appeal No. 286 of 1961.

Appeal from the judgment and order dated January 27, 1960, of the Kerala High Court in I. T. R. Case No. 14 of 1955. ·

K. N. Ra, iar; opal Sastri and D. Gupta, for the Appellant.

S. T. De.sai, J. B. Dadachan, ii, 0. o: Math1r and Ravinder Narain, for the respondent.

1962. March 20. The Judgment of the Court was delivered by

'1962

K.M S, Reddy, Commiss•

00"1er of lncomttax, Ktraf

Tht West Coas'

Chemieals an~' Industries I.Id_

HrnAYATULLAH, J.- In this a1 peal 1 y the HidayatullahJ, ('< nwiF8icr.rr d hcc n.etn:. Kernle, filcd with

ICM.s. lltdd1" Cornmis.siontr ~1/ Inccmt-loY, Kt, ala v. 'l'lit IVtsJ Cc"-'' Cl.nnicols 0111/ lnd1otri1s l.td.

llida!1Dft1lioh J,

9G2 SUPREME COURT REPORT~[l962] SUPP,

certificate cf the High Court of Kcrala, an impor. tant question vf law was raised be fort> the High Court, which was answered against the Dcparment.

It arose in the following circumstances. The res. pon<lent, the West Coast'Chcmicals and Industries, Ltd. (referi<>d to as the asscssce Company) was incorporated in rn:n primarily with the object of acquiring and working the rights, title and interest in a match factory belonging to one A. Y. Thomas at :IIu<l ical. The J[emcrandum of Associaticn of the asses;; ee Company, however, empower<'d the Comp; iny to manufacture and deal in acidR, alkalis and other chemicals.

The assessec Company carrie1l on itH bm.incss ofma1Jufact.uring matelws till the account year ending on April 30, I 941.

Ther<'after, the profits fr<•m the business became

less and less due to \Var conditions, and the asses. see Company began to ma1mfactnre plywood chests for k:i, paints and lt-mongras oil.

These were contemplated by cl. \3) of the Memorandum of A8weiation.

On 111ay, 9, 1943, the aSSeEsee Company entered into an agreement with one Hao Sahib

Natesa Iyer for the sale of tho lands, buildings, plant and machinery of its match factory for Rs. 5, 75,000. It was agreed that the price would not include manufactured good~, chemicals and other raw materials or anv ot"her asset uot shown in the agreement of sile. The purchasp, r was allowed sixty days for the payment of the balance of the price, H.s. 57,500 having been already paid at the time the agreement was entered into. The purchaser made a default in payment, and on August !l, 1943, a fresh agreement was cnkrcd into by the parties, this time for a consideration of Re. 7,35,000, and the sale included cbt mica.Is and paper for manufacture whkh had not been sold

in the first i11stance.

In a eonfidentiid repmt made on August I, 19'11, to the shareholders, the

Directors statrd that the price obtained had shown

a capital appreciation of about six timfs the cost price, and the sale of chemicals had also resulted in a substantial profit.

Meanwhile, the assessment of the Company fur the account year ending April 30, 1944, had been completed by the Deputy Commissioner of Income-tax, and the assessee Company had been assessed on an income of Rs. 36,498-6 4. The Deputy Commissioner of Income-tax then issued a notice under s. 25 of the Travancore Incom, tax Act to the Company's Liquidator on the ground that the profits from the sale of the chemicals and p>iper for manufacture had escapecl assessment.

The Official Liquidator took up the position that the match manufacturing had been stopped, and that businPsS had been wound up, and there was thus only an appreciation of the capital assets and not a busine:is profit, which was liabie to assessment. The Deputy Commissioner,· however, relying upon thA Memorandum of Association, which allowed the asses8ee Company to manufacture and sell chell)icals, and on the Directors' report, held that the assessee Company was liable to incometax on a profit of Rs. 2 lakhs arising from this sale.

The Commissioner of Income-tax on appeal, however, reduced the assessable profits to Rs. 1,15,25\1.

Before the Gommissioner, the Liciuidator admitted that the profit from the sale of the chemicals was Rs. I, 15,259.

An appeal was then filed before the Incometax Appellate Tribunal at Trivandrum, and the assessee Company contented that a stock-in-trade could only be that which was the subject of trade, and that the stock of raw materials was not sold in the oourse of ordinary trading but in a reali-

-1 sation sale after the Company had been wound up.

The Tribunal found that the business had not

J9'i2

K .iVf.R. Re<ldy, Commissioner of Income-tax, Kera/a v.

The West Coajt Chemicals and, Industries Ltd.

ifld~atul!ah .J, ·

K .. '>f.S. Rtddy, Commissioner of

lncomr;-~ x, Kerola •.

TM West Coa1t

Chemi.ais and

/11d11llrir.J l.td.

H; dayat, llah .1.

SUPRE~IB COURT REPORTS [1962) SUPP.

completcl, v ceaed to exist, since the assessee Company was carrying on manufacturing on behalf of the purchaser, 11nd the sale could not be regarded ns a realiation sale after the Company was wound up, but had the characteristics of a trading sale.

At the request of th<.> asRessee Company, however, the Tribunal referred two questions to the High Court for its deciAion, and they were: - "( 1) whPther the transaction of s:ile of the rnw materials along with the business, • incluciing machinery, plant and premises is a revenue sale, and whethrr in the facts and circumstances of t.ht' casn, the Rum of ns. I, I .~.25!1 ha.s lJ., en rightly charger! to

inome.tax; and

(2) whether the decision that the sale of match, machinery and premises, was distinct from the sale of chemicals iR legally warranted and whether there was legally a single transaction of the entire match factory inclusive of raw mawrials~" It may be pointed out that prior to the sale of chemicals to the purchaser, the only evidence of sale of chPmicals by the assssec Company was of two transactions .. In the first transaction, there was a sale of chemicals on .Tuly 24, l!J4a, to an educational institution for Rs. 50 and another sah,

on October 30, l!J43, to a stranger for Rs. 7-12·0 . . The High Court held that by th1> sale no business

was done, and that. the amount obtainNI was only hy way of realisation sa.l<>, and was not, therefore, liable to tax.

The argument of the Department (also raised hefore the High Court) proceeds in this way.

The Department reforn to the llfrmorandum of Association under which the assessee Company was to carry on the h1rnines~ of manufacturing and

selling chemicals, that in the past it had sold chemicals, that in the first sale of its assets it had ex- . eluded chemicals and some other raw materials necessary for the manufacture of matches and had sold the concern for a lesser price, that later it included chemicals and raw materials and obtained a larger price, "and that admittedly there was an identifiable profit of Rs. l, 15,259 on the sale of the chemcials and raw materials.

The Department, therefore, contends that the amount of Rs. l,15,259 was properly brought to tax as a trading profit. The question, therefore, is whether there can be said to be a sale in the carrying on of the business in respect of the chemicals and other raw materials. This qustion is not one easy to decide, specially with the assistance of rulings, in which the facts were different. There is a great danger of extracting a principle from the reported cases, divorced from the facts.

In Halsbury's Laws of 1£ngland, 3rd Edn., Vol. 20, pp. 115-117, there is a list in the footnotes of the cases which have been decided on one side or the other of the dividing line. In the text, the law, as summarised from the cases, is stated as follows :-

"210. Mere realisation of assets is not trading; but the completion of outstanding contracts after the dissolution of a firm, the commencement of liquidation of a company, or the winding up of the affairs of a trader, has been held to be trading ..... . 21 l. .. The cases illustrating the question arising in such circumstances can be divided .into two categories, first, those where the sales formed part of trading activities, and, second, those where the realisation was not an act of trading".

This distinction, in our opinion, is a sound one. The only difficulty is in deciding whether a particular

K.M .S. lleddy, Commin:onrr of.

Income-tax, Kerala

The West Co.it

Chemicals and Industries Ltd.

Hida_yafollah J.

J9G2

K JJ .S. lidd7, Comtnissicmtr of [11coma-tax, Ktra(a v.

Tht H't.sf Coajt Clum icalJ a11d lndu1tri1s l..Jtl,

Hida71ttdi.h J,

966 SUPREME COURT REPORTS (1962) SUPP.

ca.se belong• to one category or the other.

In this, much support cannot be derived from ol>scrvations made by learned , Judges pertaining to the factH of a case, but they do guide one in a true appraisement of tho case in hand.

In the well-knuwn case of Californiun Cuppu Syndicate v. Harri,, (1), the difference betwceu the purchase price and the value of the shares for which the property was cxch inged was considered as profiL assessable to income-tax. Thern, the company was

formed for the purpose of acquiring and rt'Helling mining properties, and though what it had acquired had all been sold or exchanged, the transaction was considerod a l>usiness transaction falliug within the avowed objects, of the company. The case has l>ecu accepted as decided on these uarrow facts, in 'l'ebraii (Johore) Jiubber Syndicate Ltd. v. Funner ('),

in which a different conclusion was reached o:i slightly different facts.

There also, the Company was formed with tho objoct of acquiring rubl>er estates a.nd for developing them. Under the Memorandum, the Company had the power to sell its properties.

Two properties having l>ccn acquind aud the funds having run out, they were sold but at

a profit.

This profit was considered as an appreciation of capital and uot as assessable profit.

The differonee botween these two cases is that whereas in the formor, though the whole of the prope1 ty was sold, it was sold as a part of trading, in the letter, the property was sold not as part ot trading out on a winding up sale.

The Department relics upon Californian Copper Sy1uiicate v. Harris ('), while the assessee Compauy

relies upon 1'ebrau (Julwre) Rubber Syndiwte Ltd. v.

Parmer ('). These caseH were also considered and applied by the Privy Cuneil in. Doughty ,., Commissioner of Taxes('), which 1s relied upon l>y .

(I) [190·1] S T.C. 159.

:2) [ 1910] S T.C. 658.

(3) [1927] A.G. 327.

• -

3 S.C.R • SUPl~EME COURT REPORTS 967

both sides, in view of certain observations of the Pl'ivy Council, tu which we shall presently refer. In that case, thre were two partners carryin, g on busi ness in New Zealand .as general merchants. They sold the partnership to a limited company, of which they were the only shareholders. The sale was of the entire assels including the good will, and the price was payable in the shape of fully paid shares in the new company.

The nominal value of the shares was more then the capital account as shown in the last balance sheet, and the partners 'prepared a new balance sheet in which a larger value was placed upon the stock-in-trade. The Income-tax authorities in New Zealand treated the difference between the value placed on the stock-in-trade in the old balance sheet and that placed in the new balance sheet as a profit liable to tax. The Privy Council held that this was wrong, pointing out that for profit to arise, there must be a trading, and that a mere alteration of a book-keeping entry was not evidence that there was profit. It also held that the sale was of the entire assets, and that the price represented a payment for the entire business without a separate sale or valuation of this stock-in trade for purposes of sale. It referred to two cases decided respectively by the Supreme Court of New Zealand and the High Court of Australia, in which sales by pastora lists of their flock of sheep had taken place. In the New Zealand case, the excess obtained over the book value was treated as assessaMe profit, but in . the Australian case, it was not. Bot, h the sales were of the entire stock. The Privy Council approved of the Austra.!ian case, and though it . did not ex pressly dissent from the New Zealand case, it indicated that it found it difficult to appreciate the decision. These two cases from New Zealand and Australia were, of oourse, relied upon by the rival parties before us, and we shall consider them.

K.Jf .S. Reddy, Commissioner 'f lncome .. tax1 Kira/a

The WtSt Coas1

Chemicals and Industries Ltd.

Hidaatullah J,

K.M S. R, JJr, C-0'11f11issi-OntT of Income-tax, Kera/a

v. 1hr 1VeJt Co1;1

ChernUal and l11d1otrie1 Ltd,

lli""oyatul/ah J.

968 SUPREME COURT REPORTS [1962] SUPP.

The Australian case is Commissio-11er of 'l'a:i.ntion (W. A.) v. Newman (1).

A persn11 who carried on business in WPst.ern Australia as a pastoralist sold his propctry including all live.stock and plant, as a going <'Oncern.

The Commissioner of Taxation for the State apportioned the purchn.e money in respect of the livcstoek, and assessed the n.mount which was "received in excess, as income derived from carryir, g on a business. The High Court held that the transaction was not during tho carrying on of the business or even for the purpose of carrying on the business, but was for the purpose of putting an end to the business, and that thus the exccsB represented a capitid appreciation and nut a trading profit.

The Now Zealand case is Anson v. Co1mni;; sioner of 'l'cixes ('). Ia that ca.Ile also, a sheep farmer sold his entire stock of Hheep.

He had the practice of plaoing on his sheep at the begi11ning and cud uf each year an arbitrary value without referenco to the

actual market value. When he sold his entire stock, a nominal profit of i 5,000 ud<l appeared, and ho was assessed on it. Tho Supreme Court held that

i_t .wa8 not an accretion to t'apital but a pr"tlt uu

the sale of the appellant's 8tock-in-tra<lc. ::iir John :Salmond, who delivered the judgment of Court, observed that the holding of a sheep farmer waA not a capital holding, but his sheep represented a stuckin-trade, and since every appreciation of a stock-intrade represented a profit assessable to income-tax, it mattered not that the stock-in-trade was sold at once or from time to time, Of this case, the Privy Counoil in Daw.; hty's case C) <lid not say mucl1, but enough to cast a doubt upon it.

This iH what the Privy Council said at p. 3:l5.

"It would he difficult to arrive at tho profit in this way if it were the case uf a

(l) [1921] 29 C.L.R 484. (2)

[1922'. N.7.L.R. 330.

(3) [192i] A. C. 327.

' •

- l

farmer in England; bnt the trade of a pastora- Jist is one with which the New Zealand Courts would be familiar, and which it would be more easy for the New Zealand Judges than for their Lordships to appreciate."

The Privy Council made a distinction between a sale of the entire stock as a part of trading and a sale of the same stock, as a winding up sale. It observed that if the business be one of purely buying and selling, "a profit made by the sale of the whole of the stock, if it stood by itself, might.well be assessable to income-tax". It observed that in Doughty's case (1) the sale was a slump transaction, and was a winding up of the business rather than a trading.

The Privy Council further pointed out that there is a difficulty in decidiug cases of a business, which involve breeding of sheep for the purpose of selling wool.

This is quite tme, because the sheep may be regarded as the capital, with which the wool, which is sold, is produced, or the sh3ep with the wool on them may be regarded as the stock-in-trade. Such, a question, fortunately, does not arise in the present case, which can be decided onthe narrow ground whether the business wa; being wound up and the sale, a realisation sale, or whether trading was going on in spite of the winding up, so as to attraut tax on profits made.

Before we answer this question in relation to the facts of this case, we wish to refer to a few more cases, which were cited before us. In J. & R. O'Kane & Go. v. 1'he Commissioners of Inland Revenue ( 2), tbe appellants carried on business as wine and spirit merchants.

They then wished to retire from the business and sent a circular letter to their customers.

During the year, they sold their whole stock to diverse customers, and the question was whether they were still carrying on their trade during that period, and whether the profits were thus made in the

(1)

(1927] A.C. 327.

(2) (1922] 12 T.C. 303.

K.M .8 - Reddy, Commissioner of

lncometax, Kera/a

The Wes I Coast

Ch1micals and lnduJtrics Ltd,

Hidayalullah J.

136?

1:.M .>. 11, dJy, Commisdor.tr nf , r, co11tr•:ax, hr•ala

Jiu lfrs! Co:ut Chemicals ar.d J11duJ11irJ Lid.

070 SUPREfE COURT REP0l{T5 (1962] SUPP.

onJinary course of trade. It was held by the King's Bench Division of the High Court of Justice in Ireland that the sales were not in the ordinarv couf'se of trad~ but wore part of the realisation ,; f the trading stock and winding up of the business, and thus not liable to tax. The Court of AppC'al

in Ireland unanimously re, ersed the decision of the High Court.

Honan,

L. J., pointed out that though the taxpayer had retired from busirress and had decided not to pu rchaso any more stock,. he was still carrying on the busi- 11css of trading in wines and spirits till his existing stocko were exhamted, and, therefore, the excess obtained by him represented profit. On appeal to the Houso of Lorcfs, it was held that there was e\'idonco 011 which the Commissioners could arrive at their finding that trading was, in fact, being carri<'d on.

Lord Buckmaster, speaki11g of the fads in that case, observed as follows :

"For in truth it is quite plain that right up to the end of 1\1 Ii thry were engaged in tradi11g which, so far as the cxtemal world is concerned, was the ordinary method of carrying on trade modified 011ly by arrangements which were merely part of the rnaohinory of

businPss dealing adopted to <'ffect their intention to retire. It m&y well be accepted that they die! so intend ; yet the intention of a man cannot be considered as determining

11hat it is that his acts amount to; and the real thing that has to be decided !1ere is what were the acts that were done m counect1on

with this business and whether they amount to a trading which woulcl cause the profits that accrued to be profits arising from a trade or busine?~ ?" The ca,; e was, Lhcrcforc, decided on the finding of the special Commissioners, for which there was enough material in oddcnco. Similarly, tho case

of The Commissioner of Inland Heveniw y. "Old BelShni!ls"· Distillery Co., Ltd. (in Liquid-ztion) (l)

was one decided on a finding, in support of which there wa~ evidence.

The two cases relied upon by the Dapartment afld the assessee Company respec: tively do not shed any light upon the problem before us, because the central decision in both of them was whether the Commissioners' finding was justified or not.

In J. and M. Craig (Kilm1rnock), Ltd. v. Cowperthwaite (' ), the question was how the opening stock s!:wuld have been valued, and whether any profit could be said to have resulted. The Privy

Council in IJoughty's case (") remarked about this case as follows :

"There, on a transference from one company to another, one-third of the value of each item, other than stock in trade, as it stood in the books of the selling company, was treated as its value for transfer purpose, and the balance of a slump price, which, with an under. taking to discharge JiabUities, formed the consideration, was infernntialJ v attributable to the stock. It was held, hwever, in that case that no sum could bu pitched upon as the actual price of the stock, and no claim to assess a profit could be based upon such a foundation." This case shows that where a slump price is paid and no portion is attributable to the stock-in-trade, it may not be possible to bold that there is a profit other than what results from the appreciation of capital. The essence of the matter, however, is not that an extra amount has been gained by the selling out or the exchange but whether it can fairly

tli (l926J lZ T.c. uis. c2J (l9l4J 13 r.c. 617. (3)

(1927) A.C, 327.

K.M .S. Reddy, Commissfoner (If lncoriietax, Kcrala v.

The JVest Coasi

Chmicals and Industries Ltd.

Hidayatull ,/i J.

K .. \1 S. Ucdd-''• Cummi.niomr of lnc'.m'tax. Kuala

v Thr IV, .<l Ciast (;/i, micofs and

lwlwtriu Ltd,

/lld1;111r1//oh J.

!Ji:! SUPREME COURT REPORTS [1962] SUPP.

be Eaid that there \\as a trading from whirh alone prQfit1< can arise in business. If this test is a pp lied to tho present case, th1n the true answer would be the one given by the High Court in the judgment unckr appeal.

There is no doubt., in this cam, that the asscsooe Company was wound up at leat in so far as it" match manufacture was concerned. That the business of the Company was sold as a going concern, and was, in fact, worked by the assessee Company on behalf of the buyer till the entire consideration was p>.id, makes no difference, because the <Lgrecment clearly indicated that the assessce Company was keeping the factory going, not on its own behalf but entirely on behalf of the buyer.

One cannot fairlv sav, therefore, that a sale of the eherniculs and ra~ llla

0 terials for match manufacture was anything more than a winding up sale, not with iL view to trading in chemicals and raw mat.crial but to close clown th<' busines and to realio the asset~. There was, in fact, no identifiable price for the chemicals and raw material~ except by comparing the two prices offered to be paid by tho buyer, that is to s<iy, the price without tho chemicals and raw materials and the price with them.

Prom that alone, however. it is impossible to infer that the chemicals and raw materials were sold in the 01 dinary way of business or that the assessee Company was carrying on a trading business.

The fact th[, t the clause in the Memorandum gave power to the Company to sell chemicals cauuot be used in this connection, because the eviclenco clearly 8hows that that clause wa.i never used and the two sales of chemicals through the years were too potty in themselv•'s to afford evidenco of a continued ur s:htaincd trading in chemicals. In our judgment, this was a winding up RBle with a view to realising the capital assets of the assesseo

3 S.C.R.

SUPREME COUH.T REPOH.TS 973

Company and not a sale in the course of business operations, which alone would had attracted t.ax, if profit resulted.

In the result, the appeiil fail.-i, ancl is dismissed with costs. Appeal dismi8sed.

MADANLAL FAKfRCHAND DUDHEDIYA

SHREITI CHANGDEO SUGAR MILLS L'l'D. (P. B. GAJENDRAGADKAR, A. K. SARKAR and

K. N. WANCHOO JJ.) Company-Agreement to pa11 c1Jmmission beyond specified limi'.t-Validity-Oompa.nie8 (1qf1950), 8, 76(1) & (2).

from profit.o

Act, .Wi6

There was an agreement between the respondent com~ pany, which was incorporated as a Private Limited Company in 1939, and its promoters, the appeilant and the rest l)f the

respondent~, that in consideration of the promoters having each purchased sharers worth 1-1 /2 lakhs of the company, the company would pay them 12-l/2% of the net profits every yoar.

That agreement was put in art. 3 of the ArticJes of Association of the company.

In 1941 there was a second agreement between the company, its promoters and a firm, and by it the said firm was appointed as the managing agent of the company and the commission payable to the promoters \vas reduced to 6-1 /4% and art 3 amended accordingly. There was

litigation between the parti's and the consent decrees pcissed there in left the promoters' commission in tact. Meanwhile the Companies Act, I 956, came into force and the company served a notice to the appellant saying that the promoters' commission was no longer lawful and that.art. 3 would be deleted.

The appellant then brought the suit out of which the present appeal arose, for a declaration that the agreement to pay

cor.-imission was valid and for an injunction rf"Str::iining the company from deleting the said art. 3. It was urged on behalf of the companv that s. 76( l) anrl (2) of the '"id Act had made

the agreement invalid and unenforceable. The trial court found in favour of the company and dimised the suit.

The court of appeal agreeing, with the trial court dismissed the appeal

1!162

K.M.S. Reddy, Commissioner of Income-tax, Kera/a v.

The West Co1at Chemicals tJnd

!ndurtiies l.td

Tiidayat11llah .J,

March 20.

THE WEST COAST CHEMICALS AND INDUSTRIES LTD. (IN LIQUIDATION), ALLEPPY

S. JC DAS

C. SHAH

s. 57

s. 25

s 8

art. 3

art 3

Meanwhile the Companies Act

art. 3

art. 3

s. 76( l)