7 S.C.R.

SUPREME COURT REPORTS

S!J

STATE OF UTTAR PRADESH AND ANR. v.

AUDH NARAIN SINGH AND ANR.

[P. B. GAJENDRAGADKAR, c. J., K. N. WANCHOO, J. c. SHAH,

N. RAJAGOPALA AYYANGAR AND S. M. S!KRI, JJ.J

Government Servant-Relationship of master and servant- Tahvildars whether Government Sewants-Whether provisioas of Art. 311 (2) applicable' to them-Constitution of India Art. 311(2).

The respondent was appointed 'in 1949 a Tahvildar in the District of Azamgarh in the State of Uttar Pradesh and he worked in the Cash Department of the Government Treasury of that District. His appointment was made by Government Treasurer with the approval of Collector of the District. In 1956, he was removed from service under instructions from the Collector. He filed a writ petition in the High Court in which he challenged the legality of the order removing him from service on tbe ground that he was a member of the civil service of the State of Uttar Pradesh or held a civil post under the State and hence was not liable to be removed from service .. without being afforded a reasonable opportunity of showing cause against the action proposed to be taken in regard to him under Art. 311 (2) of the Constitution. The High Court held that the respondent was an employee of the State Government and as the provisions of Art. 311 (2) had not been observed, the order terminating his services was illegal. The appellant has come to this Court by special leave.

The only question raised before this Court was, whether a Tahvildar appointed in the Cash Department in the State of Uttar Pradesh is a civil servant of the State of Uttar Pradesh or holds a civil post in the State. Dismissing the appeal,

Held: The respondent was a civil servant of the State of Uttar Pradesh and as the requirements of Art. 311 (2) were not conformed to, the order terminating his services was, invalid.

The Government Treasurer is a civil servant of the State holding a specific post and he is authorised by the ter1J1s of his employment to employ Tahvildars to assist him in discharging his duties. Payment of r, emuneraiion to Tahvildars is for services rendered in the Cash Department of the District Treasury of the State. The Tahvildars receive their remuneration directly from the State and are subject to the control of the District Officers in the matter of transfer, removal and disciplinary action. Employment of Tahvildars being for the purpose of carrying out the work of the Stafe, even though a degree of control is exercised by the Government Treasurer and the appointment is in the first in, sta!'ce made by the Treasurer subject to the approval of the D:str1ct Officers, the Tahviidar is entitled to the protection of Art. 311.

Whether in a given case, the relationship of master and servant exists is a question of fact which must be determined on a cons!deration of all m.aterial and relevant circumstances having a bearing n that question. In. general, selection by the employer, coupled with payment by him of remuneration or wages, the

19U

1964 right to control the method of work and a power to susp€nd or St 1 Utt remove from employment are indicative of the relation of master

l'rad~eh

0and A:;. and servant. However, co-existence of all these indicia is not v. predicted in every case to make the relation one of master and .Audh Narain Singh. servant. In special classes of employment, the contract of service

and Anr. may exist, even in the absence of one or more of these indicia.

Sloli, J.

But ordinarily, the right of an employer to control the method of doing the work and the power of superintendence and control may be treated as strongly indicative of the relation of master and servant, for that relation imports the power not only to direct the doing cf some work, but also to direct the manner in which work is to be done. If the employer has such power. prima fade, the relation is one of master and servant.

Shivana.ndan Sharma v. The Punjab National Bank Ltd. [1955] l S.C.R. 1427, Dharangadhara Chemical Works Ltd. v. State of Saurashtra [1957] S.C.R. 152 and Mfs Piyare Lal Adiswar Lal

v. Commissioner of Incometax, Delhi (1960] 3 S.C.R. 669, referred to.

ClVIL APPELLATE JuRISDICTION: Civil Appeal No. 120 of

1963. Appeal by special leave from the judgment and decrecdated December 13, 1960, of the Allahabad Hi11h Court in Special Appeal No. 204 of 1957.

H. N. Sanyal, Solicitor-General of India and C. P. Lal. for the appellants.

M. C. Setalvad and J.P. Goyal, for the respondents.

March 9, 1964. The Judment of the Court was delivered by ~

SHAH. J.-Audh Narain Singh-hereinafter called 'Singh' -was appointed in 1949 a Tahvildar in the District of Azamgarh in the State of U.P. and worked in the Cash Department of the Government treasury of that District. The appointment of Singh was made by Dhanpat Singh Tandon, Government Treasurer, with the approval of the District Magistrale. By order dated April 20. 1956, Singh who was then working as. a Tahvildar in the sub-treasury at tahsil Lalganj in the District of Azamgarh was informed that he was, under instructions from the Collector, removed from service. Against the order of removal, Singh preferred an appeal to the Collector but the same was rejected, and a representation made to the Commissioner of the Banaras Division was unsuccessful. Singh then preferred a petition under Art. 226 of the Constitution in the High Court of Judicature at Allahabad for a writ of certiorari quashing the order of removal passed against him and for a writ of mandamus or an order directing the Collector of Azamgarh and the State of Uttar Pradesh, Dhanpat Singh Tandon, Government Treasurer, and the Commissioner of Bimaras Division to treat him as Tahvildar in the sub-treasury at Lalganj in the District of Azamgarh. Singh claimed that he was a member of the civil service of the State of Uttar Pradesh or

held a civil post under the State, and was not liable to be 1964 removed from service without being afforded a reasonable State of Utl4r opportunity of showing cause against the action proposed to Pradeah and Anr. be taken in regard to him under Art. 311(2) of the Constitu- Awlh Na;.;; n Si11g.ll tion. Mehrotra J., who heard the petition held that the Governan4 Anr. ment Treasurer being an employee of the State, a Tahvildar employed by the Government Treasurer to carry out the work entrusted by the State, subject to the control of the State Government, was an employee of the State Government. and the impugned order of removal was invalid because Singh was not afforded a reasonable opportunity of showing cause against the action proposed to be taken in regard to him.

The order of Mehrotra J ., was confirmed in appeal by the High Court of Allahabad. In the view of the High Court, no direct relationship of master and servant between Singh and the State was established because Singh was appointed by the Treasurer, but the Treasurer having authority to employ him in order to carry out the work of the State, Singh was as much under the control of the State as he was under the control of the Treasurer and therefore he could claim to hold a civil post under the State and to have the benefit of Art. 311 of the Constitution. Against the order passed by the High Court, this appeal is preferred with special leave.

The question which falls to be determined is whether a.

Tahvildar appointed in the Cash Department in the State of Uttar Pradesh is a civil servant of the State of Uttar Pradesh or holds a civil post in the State. ln the State of Uttar Pradesh, contracts for administering the Cash Department of the District treasuries are given to persons who are called Government Treasurer. The Treasurer holds a post specifically created in the District Treasury: he is appointed by the Collector subject to the approval of th~ Finance Secretary. On lx; ing appointed, the Treasurer enters mto an engagement for the due performance of bis duties, and executes a bond in favour of the State.

The tenure of a Government Treasurer is temporary and he is not entitled to privileges of leave and pension, but he performs various duties connected with the executive functions of the State. His appointment is made by the Collector subject to the approval of the Finance Secretary. He has to maintain a true and faithful account of the property entrusted to him and his dealings therewith and to submit returns as prescribed. He is also bound by the conditions. rules and regulations of the 9overnment ad also. departmental rul7s and .orders as may be m. force, espec1~1ly with !eference. to his relat10ns and dealings with and the nght of his subordmates. He has to attend the Government Treasury for the purpose of discharging his duties and to show to his surior officers whenever called upon th; property entrusted to him. A Government Treasurer is not in

Shah, J.

SUPREME DOURT. REPORTS [1964)

1964 the position of an independent contractor; he does not merely

State of uitar undertake to produce a given result, without being in the actual Praduhnd Anr. execution under the control of the person for whom he: does udh N v.. s' h the work. He is in the execution of his duties, and in the 1 andarl~~ 1 "'!I manner, method and mode of his work under the control of _, the State Government.

Shah, .J A Government Treasurer is entitled to appoint Tahvi/dars to assist him in the discharge of his duties, but the appointment is made with the approval of the District Collector.

Originally Tahvildars were directly appointed by the Government of the Province to specific posts for performing duties in the District Treasuries. In 1927, however, Government Order dated July 25, 1927, was issued by the Secretary to Government Uttar Pradesh, Finance Department, reciting that Tahvildars in sub-treasuries were appointed on the nomination of the Treasurer of the District Treasury, who was responsible for their work and honesty, the intention of the Government being that a Treasurer might dispense with the services of a Tahvil dar as soon as he had Jost confidence in him, but it had not been possible to put this intention into practice, because the Tahvildars were paid from the general revenue and were whole-time Government servants and entitled to the protection given to all Government servants by the Classification Rules, and it .was difficult to hold the usual enquiry for the removal of a Tahvildar for he must be removed from service as soon as he lost the confidence of the Treasurer, otherwise the responsibility of the Treasurer to the Government would be impaired.

In the circumstances, the best solution was to abolish the post of Tahvildars, to increase the remuneration of the Treasurer by an amount equal to the pay given to Tahvildars and to make him responsible for carrying on the work at sub-treasuries through his own servants. A reservation, however was made that the Treasurer must not employ any person in the treasury or sub-treasury without the approval of the District Officer and the Treasurer shall, when required by slich District Ollieer remove without delay any person so employed. Pursuant to this Government Order, in the Manual of Orders the following paragraph-1561 wasincorporated: ·

"Tahvildars at sub-treasuries are no longer Government servants. They are employed by the Treasurer who receives an allowance from Government to cover their pay and leave salary. The Treasurer however, shall not. empfoy any pepon as a Tahvildar without the a111lroval of the District Officer. The Treasurer shall remove a T ahvi/dar or transfer him from one Tahsil to another if required (by the District Officer to do so on any ground which in the latter's opinion would justify such a step."

Even after the posts of Tahvildar were abolished the 1964 Government of Uttar Pradesh did not adopt a consistent atti- State of uttar tude and from time to time issued orders which indicate that a Pradesh aad Anr. considerable degree of control was maintained by the DistrictA dh N v., 8 . , . . • u J.. arain inglf Officers upon the Tahv1ldars m the matter of appomtment, aad Anr. removal from service, suspension and transfers and in the matter of payment of remuneration, dearness allowance and making available certain medical benefits, Tahvildars were treated on a par with other civil servants of the State. On December 9, 1939, a Government Order was issued for payment of remuneration to the Tahvildars directly from the Government Treasury. It had come to the notice of the Govc; rnment that the Treasurers paid to the cashier staff of the treasuries less than what they received on their account from the Government, after obtaining receipts for full amount. It was therefore directed that the Treasurer should prepare a statement showing in detail the emoluments of the staff, but payment of emoluments was to be made to the persons concerned by the Treasury Officer personally and their acknowledgment taken. In 1945 the Government of Uttar Pradesh raised with effect from April l, 1945, the allowance to be paid tO Government Treasurers for the pay of "the cashier staff of treasuries." By para 3(a) a scheme for payment of gratuity on retirement was also devised for the benefit of permanent Tahvildars. It was provided that when a permanent Tahvi/dar retired, a gratuity of one month's pay will be given to him for each completed year of service, subject to a maximum of Z5 years' completed service, the gratuity being admissible to permanent incumbents of posts and also to future entrants when appointed permanently, but not if the service of a Tahvildar was found either unsatisfactory, or if he resigned or was removed or dismissed from service. Gratuity was to be paid in the same manner as salaries were paid to the Tahvildars, and provisions on account of the increase due to the pay of Government Treasurers and allowances payable for the pay of the cashier staff of treasuries and for the grant of gratuity to the cashier staff were made under the Heads "25-General Administration-B-District Administration

(a) General Establishment, Pay of Establishment-Contract and Extra Contract Establishment" and "55-Superannuation Allowances and Pensions and Gratuities Voted" respectively in the budget. By a letter dated June 17, 1953, addressed by the Joint Secretary to the Government, it was broughi to the notice of the Collectrs of Distr!cts that the. Government Treasurers had frequently

dtpensed with the services of T ahvildars working under them without sufficient reasons justifying such a course of action and attempts had been made to harass such staff and that as a result of such arbitrary action on the part of the Government Treasurers, hardship had been caused to those employees. The Government therefore informed the Collectors to bring to the

Shah, J.

1961 notice of the Treasurers that adverse notice of such action is -·- likely to be taken by the Government in future in case it was

/;:J,,~'(.u,:; a;.., established that the Government Treasurers had indulged in v. ' high-handedness in their dealings with their staff. It was also Aodh Narain Sing/• recorded by the Collector of Azamgarh that instances had

and Anr. come to his notice in which the services of the employees in

Sioah, J. the Cash Department of the treasuries had been dispensed with arbitrarily without framing specific charges against them or obtaining explanations, and it was ordered that in future when services of the employees in the Cash Department were to be dispensed with. a report for their suspension should be made and specific charges framed against them and they should be given time to explain the charges and their services should not be dispensed with as a result of arbitrary action of the subordinate staff or the Treasurer. Orders have also been lately issued in 1959, by which the scale of dearness allowance of the Tahvildars was revised and certain facilities for free medical attendance were also provided.

It also appears that in some cases in which the Tahvi/dars who had been dismissed or suspended were reinstated by order of the Collector. For instance, under Treasury Officer, Azamgarh's order dated August 14, 1948. it was recorded that under the Collector's order Naunidh/ Prasad, Tahvildar, Phulpur (under suspension), was reins(ated with effect from the date of taking over charge. There is also an order passed by the District Magistrate, Allahabad, in 1952 deputing one Ganesh Prasad working as Ta/1vildar in Handia sub-treasury for Kumbha Mela duty. There is also the record of the disciplinary proceeding held by the District Magistrate on April 12, 1948, against Tahvildar Ganesh Prasad for improper conduct.

It is therefore clear from the record that T ahvildars were appointed to perform the duties of cashiers in Government Treasuries. Their appointment was made by the Government Treasurer with the approval of the District Collector, but it was made for performance of public duties, and remuneration was paid to them by the State directly. Tahvildars were liable to be transferred under orders of the Collector and to be suspended or removed from service under his orders. An instance already referred to shows that a Tahvildar who hadi been suspended by the Treasurer was ordered to be reinstated by the Collector. It is from these circumstances that the relationship between the Government of Uttar Pradesh and Tahvildars has to be ascertained.

Whether in a given case the relationship of master and servant exists is a question of fact, which must be determined on a consideration of all material and relevant circumstances having a bearing on that question. In general selection by the employer, coupled with payment by him of remuneration or wages, the right to control the method of work, and a power

to suspend or remove from employment are indicative •of the 1961 relation of master and servant. But co-existence of all these State of uuar indicia is not predicated in every case to make the relation Pmde<o and Anr. one of master and servant. In special classes of employment •. fodh .Var:in Singh a contract of service may exist, even in the absence of one or and Anr. more of these indicia. But ordinarily the right of an employer to control the method of doing the work, and the power of superintendence and control may be treated as strongly indicative of the relation of master and servant, for that relation imports the power not only to direct the doing of some work, but also the power to direct the manner in which the work is to be done. If the employer has the power, prima facie, the relation is that of master and servant.

The work of the Government Treasurers has to be conducted according to the Rules and Regufations framed by the Government, and directions issued from time to time. The Government Treasurer holds a post in a public employment and he is assisted by Tahvi/dars in the performance of his duties. The Tahvi/dar acts not on behalf of the Treasurer in performing his duties, but on behalf of the State. Undoubtedly the Trei.surer undertakes responsibility for the loss which may be occasioned by the Tahvildar, but solely on that account it cannot be held Iha I the Tahvildar is merely an appointee of the Treasurer and is not a servant of the State. The selection of T ahvildar though made by the Treasurer is controlled by the Collector; the Tahvi/dar is remunerated by the State, method of his work is controlled by the State, and the State exercises the power to suspend, dismiss and reinstate him. In Shivanandan Sharma v. The Punjab National Bank Ltd.(') it was held that a head cashier in one of the branches of the Punjab National Bank Ltd., who was appointed by the Treasurer in-charge cf the Cash Department under an agreement with the Bank, was an employee of the Bank. In the view of the Court, the direction and control of the cashier and of the ministerial staff in charge of the Cash Department the Bank being entirely vested in the Bank, the cashier must be deemed to be an employee of the Bank. Sinha J., observed at p. 1442:

"If a master employs a servant and authorizes him to employ a number of persons to do a particular job and to guarantee their fidelity and efficiency for a cash consideration, the employees thus appointed by the servant would be equally with the employer, servants of the master."

Similarly in Dharangadhara Chemical Works Ltd. v. State of Saurashtra(') it was held that "the prima facie test of" the

(') [1955] 1 S.C.R. 1427.

(']) [1957] S.C.R. 152.

Shah J.

State of Uttar Pradesh and Anr. v.

Aw; li,, Narain Singh

and Anr.

SUPREME COURT REPORTS [19641 • relationship of master and servant "is the existence of the right in the employer not merely to direct what work is to be done but also to control the manner in which it is to be done, the nature or extent of such control varying in different industries and being by its nature incapable of being precisely defined." In MI s Piyare Lal Adishwar Lal v. The Commissioner of Income-tax, Delhi(') it was held that the Treasurer appointed by the Bank who was to carry out the duties as directed by the Bank was a servant of the Bank, and not an independent contractor.

The Government Treasurer is a civil servant of the State holding a specific post, and he is authorised by the terms of his employment to employ Tahvildars to assist him in discharging his duties. Payment of remuneration to the Talzvildars is for services rendered in the "cashier department of the District treasury" of the State. The Tahvildars receive their remuneration directly from the State, and are subject to the control of the District Officers in the matter of transfer, removal and disciplinary action. Employment of Tahvildars being for the purpose of carrying out the work of the State, even though a degree of control is exercised by the Government Treasurer and the appointment is in the first instance made by the Treasurer subject to the approval of the District Officers, it must be held that the Tahvildar is entitled to the protection of Art. 311 of the Constitution.

The order removing Singh from service was made at the instance of the Collector, and did not conform to the requirements of Art. 311 (2) of the Constitution and was on that account invalid.

We therefore agree with the High Court, that the impugned order must be declared invalid.

The appeal fails and is dismissed. with costs.

Appeal dismissed.

J

STATE OF UTTAR PRADESH AND ANR

AUDH NARAIN SINGH AND ANR

P. B. GAJENDRAGADKAR

K. N. WANCHOO, J.

c. SHAH

N. RAJAGOPALA AYYANGAR

Art. 311

Constitution of India

Art. 311(2)

State of Uttar Pradesh

Art. 311

Art. 311

Uttar Pradesh

Art. 311

Art. 311

.Audh Narain Singh

Sloli

(1960] 3 S.C.R. 669

ClVIL APPELLATE

H. N. Sanyal

C. P. Lal

M. C. Setalvad

J.P. Goyal

SHAH. J.-Audh Narain Singh

Singh

Dhanpat Singh Tandon

April 20. 1956

Lalganj

Azamgarh

Art. 226

High Court of Judicature at Allahabad

Pradeah

Art. 311(2)

Mehrotra

High Court of Allahabad

Art. 311

Tahvildar

Shah

July 25, 1927

Government of Uttar Pradesh

December 9, 1939

April l, 1945

June 17, 1953

Aodh Narain Sing/•

Sioah

Azamgarh

August 14, 1948

Phulpur

District Magistrate, Allahabad

Ganesh Prasad

April 12, 1948

Tahvildar Ganesh Prasad

Iha I

Punjab National Bank Ltd.

Sinha

[1955] 1 S.C.R. 1427

Art. 311

Art. 311


.April 28

SUPREME COURT REPORTS (1964]

COMMISSIONER OF INCOME-TAX, PATNA

RANI BHUWANESHWARI KUER

[K. SUBBA RAO, J. C. SHAH ANDS. M. S!KRI, JJ.]

Indian Income-tax Act, 1922 (11 of 1922) s. 16(l)(cl and its proviso th1ee-Deed of trust by assessee-Beneficiaries of the Trust are assessees and other persons-Trust and revocable within siX years-If the income of the Trust can be included as part of the income of the assessee.

The assessee (respondent) owner of an estate known as "Tekari Raj" exe:uted an indenture of trust d"ted January 20, 1941 whereby the "Tekari Raj" and certain Zarnindari properties owned by her were conveyed to certain named trustees to be held in trust, subject to conditions specified therein. This deed was created with a view to liquidate the debts of the Tekari Raj. The beneficiaries under the deed were the settlor, her husband ahd her five sons. This original deed was modified by a deed of rectification dated December 22. 1941. It was prov:ided in the original cl. 43 of the deed of trust dated January

20, 1941, that the settlor may at any time during her life revoke or vary either wholly or partly the trust or any provisions of the deed but not before the payment and discharge of certain debts and liabilities. Clause 43 of the original deed was subsequently modified by the 45th clause which was added by the deed of amendment dated January 12, 1942. By cl. 45 of the deed of amendment the right of revocation was not exercisable till the Thica leases in favour of the Maharajadhiraj of Darbhanga and - Capt. Maharaj Kumar Gopal Saran Narain Singh rema; ned good and effective. It was the common ground that the lease in favour of the Maharajadhiraj of Darbhanga was to enure till 1965 and the lease in favour of Capt. Maharnj Kumar Gopal Saran Narain Singh till 1954.

In assessing the assessee to income-tax for the year 1947-48, the Income-tax Officer incltuded in her total income the income of the trust. The matter went up to the High Court and the High Court set aside the assessment order passed by the Income-tax Officer. The High Court held that as the trust was not revocable for a period of six years, the income received by the beneficiaries (other than the assessee) was not liable to be taxed as the assessee's income till the power to revoke arose in her favour. The appellant obtained special leave against the order passed by the High Court. Hence the appeal.

The principal question for consideration before this Court was whether the income received by the beneficiaTies other than the assessee could be included in the total income of the assessee under s. J6(1}(c) of the Act.

Held: (i) In terms the third prov!so to s. 16-(l)(c) of the Income-tax Act excludes from the operation of the principal clause that part of the income alone which arises to any person under deed of settlement: it does not remove from its protection the entire deed of trust, if part of the income is not covered by the conditions prescribed or if the settlor has in a part of the income interest direct or indirect. The third proviso does not operate to exclude the income which the settlor receives as a beneficiary from liability to tax.

'(.

(ii) The third proviso to s. 16-(l)(c) of the Act does operate in respect of settlements, dispositions, or transfers which Oommiuion<r of are by thQ first proviso revocable for the purpose of that Income-ta>:, Paino clause. v.

(iii) Two conditions are necessa:ry for the application of the 3rd proviso to s. 16-(l)(c) of the Income-tax Act: (i) that the trtlst should not be "'vocable for a period exceeding 6 years or during the life time of the beneficiary and (ii) the settlor or disponer should have no direct or indirect benefit from the income given to the beneficiary. The effect of the two coaditions is that, that part of the income which arises to any person by virtue of the settlement which is not revocable for a period of six years or which is not revocable during the life time of the beneficiary will not be included in the settlor's income, provided that from. the income of such person the settlor derives no benefitairect or indirect.

On the construction of the deed of trust it was held that the deed was not revocable within six yea:rs provided by s. 16

(l)(c) of the Act. Ramji Keshavii v. Commissioner of Income-tax, Bombay, 13 I.T.R. 105, relied on.

(iv) On the facts of this case it was held that by virtue of the third proviso to s. 16-(l)(c) of the Act the income received by the beneficiaries under the deed of trust other than the assessee could not until the power of revocation arose to the assee, be deemed to be the income of the assessee for the purpOse of assessment to income-tax.

QVJL APPELLATE JURISDICTION: Civil Appeal No. 620 of 1963. Appeal by special leave from the judgment and decree dated 9, 1961 of the Patna High Court in M.J.C. No. 497 of 1957.

N. D. Karkhanis and R. N. Sachthey, for the appellant.

Sarjoo Prasad, B. D. Singh and D. Goburdhan, (or the r1&pondent.

April 28, 1964. The judgment of the Court was deliv, ered

SHAH, J.-Rani Bhuwaneshwari Kuer-hereinafter re- .,. ferred to as 'the assessee' was the proprietor of a seven-sixteenth share in an estate known as 'Tekari Raj', having inherited that estate from her parents.

The assessee later acquired by purchase a major portion of the remaining ninesixteenth share in the Raj. The estate held by the assessee was heavily encumbered, and with a view to arrange for liquidation of the debts the assessee executed an indenture of trust dated January 20, 1941, whereby the Tekari Raj

~ and certain zamindari properties owned by the assessee werg

conveyed to certain named trustees to be held in trust, subject to conditions specified therein. The principal beneficiaries under the deed after payment of the debts were the assessee, her husband and her five sons.

Ra11i BhuwaneB1nca1 i x,,..

1961 By the 23rd clause of the deed it was directed that after a"""";,.'°"'• of making certain payments, the trustees shall divide the sur- 1.._.ia,,, Patna plus of the net rents, issues and profits thereof in the propori',;,., tions set out in the clause. The 24th and the 25th clauses Blu.,,..,...h..,,; dealt with the devolution of the beneficial interest in the Kevent of death of any of the beneficiaries. By the 4lst clause Shah, J. it was provided that after the debts and liabilities set out in Sch. 'D' to the deed were paid off and discharged, the settlor < shall be entitled to make a permanent trust of some of the villages demised under the deed . for the maintenance and up-keep of the 'lekari Forts, observance of Durga Puja and other purpQses specified . therein, and in the event of the settlor dying before payment and discharge of the debts and liabilities set out in Sch. 'D', and without making any permanent trust for the purposes enumerated, the settlor enjoined the trustees after discharge of the debts mentioned in Sch.

'D' to set apart property fetching a net income of Rs. 20,000 ! • to form the corpus of the permanent trust to meet the expenses relating to the repair of the Tekari Forts, celebration of Durga Puja and other purposes specified. By the 42nd clause it was provided that the trust under the deed shall terminate after payment of the debjs and liabilities set out in Sch. 'D' or after the death of the last amongst the sons, whichever event shall last occur, and by the 4Jrd clause it was provided that if any of the beneficiaries under the deed or their heirs in future shall challenge the Indenture of Release and Agreement dated December 6, 1939, executed by the settlor in favour of her husband and the action taken thereunder. the said beneficiary shall on making such objection forfeit his. right as a beneficiary under the deed. lt was also provided that if there shall be any breach by any of the beneficiaries or of the covenants or conditions and limitations imposed under the deed, he, or she. shall not be entitled to any money or to any share in the rents, issues or usufruct of the trust property and he or she shall be deemed

,,..

to have been excluded from the categories of beneficiaries and his or her share of the rents, issues and profits will be , dealt with or enjoyed by the settlor in her entire discretion, provided always that the settlor may at any time during her life by any deed revocable or irrevocable revoke or vary either wholly or partly the trust or any provisions of the deed, but not before the payment and discharge of the debts and liabilities as mentioned in Sch. 'D'. and provided further that notwithstanding such revocation. of the trust the settlement made under the deed remained good and effective -l subject to the forfeiture clause set out therein. ·

This deed. was modified by a deed of rectification dated December 22. 1941, reciting that with the consent of all persons who were parties to the deed of trust, it was direeted

...

7 S.C.R.

SuPREME COU:RT REl'OHTS 923

that at any time during the lifetime of the assessee the asses-

19~ see had the power to revoke or vary, either wholly or partly, Oommi88ioner of the trust or any provisions of the deed of trust, but nof so Income-tax, Pain• as to effect the payment and discharge of the debts and liabi-

R;;, lities as mentioned in Sch. 'D' thereto and the original deed Bhu•"aneahwa>i

of trust shall be read and construed as if it containej a Kuer _ power vested in the settlor (the assessees) during her life sh, h, J. by deed to revoke or vary, either wholly or partly, the trust or any provisions of the said trust, but not so as to effect the payment and discharge of the debts and liabilities as mentioned in Sch- 'D'.

Another deed called a deed of amendment was executed by the assessee on January 12, 1942. By this deed paragraphs 22, 32, 33, 35, 36 and 37 of the original deed were cancelled and other paragraphs including paragraphs 23, 24 and 42 were amended and modified and paragraphs 42(a), 44 and 45 were added. By the amendment of paragraph-23 the Sur plus rents, issues and profits of the trust property were to be divided in seven equal shares and by the amendment made in cl. 24 it was provided that in the event of the death of any of the sons, his share of the rents, issues and profits shall become payable to his heir or heirs. By the modifications in paragraph-42 it )!as provided that the trust under the deed may terminate after payment of the debts and liabilities df the trust that would then be outstanding or a{ter extinguishment of the Thicca leases in favour of the Maharajadhiraj of Darbhanga or in favour of Capt Maharaj Kumar Gopal Saran Narain Singh of Tekari, whichever event shall occur last. Paragraph 42(a) provided that after the provisions as laid down in para 41 had been carried out and when the last contingency set out in para 42 as modified had arisen, the

beefic!ar!es or the heirs or successors-in-interest or representattves-m-mterest of such of them as had acquired any right from any of the beneficiaries under the deed shall be entitled to pai?tion the trust property according to their shares. The material part of paragraph-45 provided :

"That the settlement made under these presents shall be anent, unalterable and irrevocable so far the mterest created under these presents are concerned, but each beneficiary shall have full riaht I? make any !!Ort of arrangement about devlu tion or. succession or make such alienation, as he may thmk fit. about his share, but the trust created under these presents shail be mevocable so l?n!l .e debts mentioned above including all the liabihtles on the Trust property up to date are

no~ fully paid _up or discharged or so long as the cca leases in favour of Hon'ble Maharajadhira1 of Darbhanga or Capt. Maharaj Kumar Gopal

Oommiarirmer of lncontt-tazt Pattm

Y, Rani Bhuuonul&wari

Kmr

Shall, J,

Saran Narain Singh remain good and effective whichever event shall happen last".

Provided that always para 43 of the Indenture of Trust dated 20th January, 1941, shall hence forth be read subject to this para.

• • • •

In proceedings for assessment for the assessment year 1947-48 the Income-tax ()_fficer, Gaya-Palamau Circle, Ga ya, rejected the contention raised by the assessec that the income under the trust was taxable in the hands of the trustees under the deed of settlement and applying the provision of s. J 6(J)(c) of the Indian Inoome-tax Act, 1922, brought the income of the trust to tax as part of the assessee's income.

The order passed by the Income-tax Officer was confirmed in appeal to the Appellate Assistant Comm!ssioner. but the Income-tax Appellate Tribunal reversed that order.

The Tribunal observed that "revocation involved taking back that which was given once, but in the present case there was nothing done by the assessee by which it could be said that she had taken back what she had given by the original deed of trust", and the trost was therefore not a revocable trust as contemplated by s. 16 (I) (c) of the Income-tax Act.

The High Court of Judicature at Patna directed the Income-tax Appellate Tribunal under s. 66(2) of the Act to state a case and to refer the following questions:

(I) Whether the trus( created by the assessee is a revocable trust within the meaning of s. lb(l)(c) of the Income-tax t ct?

(2) Whether the income from the property which is the subject-matter of the settlement mentioned in question (I) can be deemed to be the income of the assessee under s. 16 (I) (c) of the Income-tax . .A.ct? ·

The High Court held that the deed of trustdated January 20,

1941 (as modified by the subsequent deed dated January 12,

1942) was within the meaning of s. 16 (I) (c) of the Incometax Act a revocable trust, but not being revocable for six years from the date of its creation, bv virtue of the third proviso to s. 16 (I) (c) which controlled not merely the substantive provisions of s. 16 (I) (c) but the first proviso to that section as well, the income received by the beneficiaries (other than the settlor) under the deed of trust was not liable to be included in the income of the assessee. Th?. High Court accordingly directed that the income of the trust property which is the subject-matter of the settlement of the trust was not liable to be assessed to tax under the third proviso to s.

. 1964 16(l)(c), but only so long as the power of revocation granted _ by the deed was not exercised by the assessee under theterms Oommi<ai"""r of of the deed of trust. The High Court also declared that the Tncome..iax, Palwa assessee was liable to pay tax on the income received by her

R;,;. in the character of a beneficiary out of the trust properties.

Bhu.,.,...h- . g,....

Against the order passed by the High Court, with special leave, the Commissioner of Income-tax, Patna, has appealed to this Court.

The principal question which falls to be determined in this appeal is whether by the third proviso to cl. (c) of s. 16(1), income received by the beneficiaries other than the assessee is income arising to them by virtue of a settlement which is not revocable for a period exceeding six years, and from which income the assessee. derives no benefit direct or indirect.

Section l 6(l)(c) provides :

"(l) In computing the total income of an assessee-

(a) • • • (b) • • •

(c) all income arising to any person by virtue of a settlement or disposition whether revocable or not, and whether effected before or after the commencement of the Indian Income-tax (Amendment) Act, 1939, <VII of 1939), from assets remaining the property of the settlor or disponer, shall be deemed to be income of the settlor or disponer, and all income arismg to any person by virtue of a revocable transfer of assets shall be deemed to be income of the transferor : Provided that for the purposes of this clause a settlement, disposition or transfer shltU be deemed. to be revocable if it COlrtaiDt Ml¥ provisions for the retransfer directly or indirectly of the income or assets to the settlor, "disponer or transferor, or in any way gives the settlor,. disponer or transferor a right to reassume power directly or, indirectly over the income or assets : Provided further that the expression "settlement or disposition" shall for the purpose of this clause include any disposition, trust, covenant. agreement, or arrangement, and the expression ''settlor or disponer" in relation to a settlement or disposition shall include any person by whom the settlement or disposition Will! made: Provided further that this clause shall not apply to any income arising to any person by virtue of a settl~

ment or disposition which is not revocable for a

Shah, J,

Connniioner of Jncome-la:i, Patna

period exceeding six years or during the lifetime of the person and from which income the settlor or disponer derives no direct or indirect benefit but .that the settlor shall be liable to be assessed v.

Bat&i.

Bkuwa'nUkwari

Kuer

Shah, J.

on the said income as and when the power to revoke arises to him."

The High Court held that the deed of trust was one in which the assets remained the property of the sett I or, but as the trust was not revocable for a period of six years the income received by the beneficiaries (other than the assessee) was not liable to be taxed as the assessee's income till the power to revoke arose in his favour.

The point in dispute in this appeal is about the applicability of the third proviso to s. J 6(l)(c), which seeks to exempt from the operation of the principal clause income which arises to any person under the deed of settlement executed by the assessee. Two conditions are necessary for the application of the third proviso-(i) that the trust should not be revocable for a period exceedig six years or during the lifetime of the beneficiary and (ii) the settlor or disponer should have no direct or indirect benefit from the income given tq the beneficiary. • Counsel for the Commissioner contended in the first instance that the third proviso to s. l6(l)(c) applied to the trust created by the assessee because in fact within six years of the date of its execution the deed was revoked, and that in any event on a true interpretation of the covenants of the deed of trust it was revocable within six years. The plea that the trust was in fact revoked within six years was never raised before the Revenue authorities, the Tribunal or even the High Court, and is plainly unsustainable. There are, it is true, certain recitals made in the deed dated September 18, 1946, executed by the assessee, which is styled "Deed for further alteration of terms & constitution of trust" by the assessee, that the liabilities referred to in Sch. 'D' to the deed of trust dated January 20, 194 l had been fully discharged and the beneficiaries had been, receiving the surplus rents, issues and profits according to their respective shares in the same and the settlor had by a deed of trust dated May 28, 1946 conveyed and settled a portion of her seventh share in the rents, issues and profits of the trust properties, as well as in the corpus of Shri Bhubneshwari Hari Haresh Private Trust for meeting certain expenses. But those recitals do not even primq facie indicate that the trust was revoked at any time.

We cannot therefore entertain this new ground raised for the first time in this Court. ·

It may be noticed that whereas under the original cl. 43 of the deed of trust dated January 20, 1941 even though the

7 s.c.a.

SUPRE.'.\IE COURT REPORTS 927

trust was expressly made revocable, it could not be revoked 1964 before payment of the debts and discharge of the liabilities aommi.!.rioner ol mentioned in Sch. 'D'. By the 45th. clause which. was added lllCO!Jl<laz, Pa1by the deed of amendment dated January 12, 1942, the settle- &ni ment made under the deed was declared permanent, unalter- Blluwaneshwan. able and irrevocable so far as the interest created under the x.,,, deed of amendment was concerned, and was also to stand irrevocab.le so long as the debts mentioned in Sch. 'D' and other liabilities of the trust including all the liabilities on the trust properties were not fully paid up and discharged and so long as the leases in favour of the Maharajadhiraj of Darbhanga or Capt. Maharaj Kumar Gopal Saran Narain Singh remained good and effective, whichever event last happened.

It is conceded that the lease in favour of the Maharajadhira, i of Darbhanga was to ensure till 1965 and the lease in favour of Capt. Maharaj Kumar Gopal Saran Narain Singh till 1954.

By cl. 45 of the deed of amendment the right of revocation was not exercisable till the Thicca leases in favour of the Maharajadhiraj of Darbhanga and Capt. Maharaj Kumar Gopal Saran Narain Singh remained good and effective, and we are unable to hold that the deed of trust was revocable within six years as provided by s. !6(l)(c) of the Act.

It was urged on behalf of the Commissioner in the alternative that the third proviso to s. 16(\)(c) did not protect the assessee against the application of the substantive part of that clause, because the assessee was deriving under the terms of , the deed of trust a direct benefit. There are in the third proviso, two cumulative conditions on the existence of which the exemption from liability to have the. income arising from a -. settlement included in the asseSsee's income. The effect of the two conditions is that, that part of the income which arises to any person by virtue of the settlement which is nN revocable for a period of six years or which is not revocable during the lifetime of the beneficiary will not be included in the settlor's income, provided that from the income of such person the settlor derives no benefit direct or indirect. The third proviso to s. 16(l)(c) does not operate to exclude the

~ income which the settlor receives as a beneficiary' from liability to income-tax : it merely excludes that part of the ipcome which is under the deeaof settlement given to another person from liability to tax in the hands of the settlor, if the conditions prescribed by the third proviso are fulfilled.

The contention raised by the Commissioner that if under the deed of trnst the settlor has reserved to himself as a beneficiary any part of the income of the property settled, the third proviso will not apply to the deed of trust runs contrary to :the plain •• words of the statute. In terms the third proviso excludes from the operation of the principle clause that part of the income alone which adses to any person under a deed of

Shah, J.

l!t(jJ

tQmmi., sioncr of n·imfta.r, P1itw; a •. '

Ur,1i Ill 1;1.1·1tnei::l1wari

Kt1tr

.-~1t11li, '

settlement: it does not remove from its protection the entire deed of trust, if part of the income is not covered by the conditions prescribed or if the settlor has in a part of the income interest direct or indirect.

, ...

Finally, it was contended that the third proviso only operates in respect of deeds of settlement or disposition which are referred to in cl. (c), but nofi to deeds of settlement or disposition which by the first proviso are deemed to be revocabk in the conditions mentioned by the first proviso. In other words. it is submitted the benefit of the proviso is not available in those cases where the settlement or disposition is deemed by the proviso to be revocable, because it contains a provision for the retransfer directly or indirectly of the income or assets to the settlor, or in any way it gives the settlor, disponer or transferor a right to reassume power directly or indirectly over the income or assets. We are unable to agree with this contention also. By the first proviso, settlements, dispositions or transfers of the character described therein, are deemed revocable for the purpose of the principal clause. The function of proviso I and proviso II is plainly explanatory. The second proviso in terms says that the expression "settlement or disposition" is to include any disposition, trust, covenant, agreement. or ~; rrangement, and the expression "settlor or disooner" is to include any person by whom the settlement or disposition was made.

Similarly the first proviso states that sen!ements. dispositions or transfers, if they are of the characttt described, shall for the purpose of the principal claus, e be r!!l'Ocable transfers. If that be the tfoelnterpretation, and we think it is, it would be impossible to hold that the third proviso does not operate in respect of settlements, dispositions or transfers which are by the first proviso revocable for the purpo.•:e of that cln•ise.

In a case decided by the Bombay High Court Ramji Keslwvji v. Commissidflo of Income-tax, Bombay(') Kania, J., in considering the scheme of s. 16(1)(c) observed:

"The first stage is that when there is a revocable transfer of assets, the income derived from such assets is still to be considered the income of the settlor.

The law next specifies by proviso I what would be deemed a revocable transfer. in spite of the deed being apparently irrevocable. The relevant question for that proviso is this: Is this transfer revocable because it fulfils the conditions contained in the proviso? The answer to that question can be only, it is revocable, or it is not. If the answer " is in the negative, no further discussion can arise

(') 13 I.T.R 105.

~ 7 S.C.R.

SUPREME COYRT REPORTS 929

beeause, on the face of it, the deed is not revocable 1964 and, therefore, it does not come under Section Oommi., ivmr of l 6(l)(c). If, however, the answer to the question lncome-tnx, P"""'

is in the affirmative, the deed although ostensibly iI,.",, i irrevocable, is deemed to be revocable, and thus Bhuwa••"hwari becomes a revocable transfer of assets, within the Kiw meaning of the substantive provision of Section Shah, J. 16(l)(c). Having reached that stage, the law proceeds to consider further what is found in proviso

3. The scheme appears to be that although in fact, after reading the provisions of Section 16(l)(c) with proviso I, the transfer is revocable, the law will not still consider the income derived from such a settlement the income of the settlor, provided the settlement is not revocable for a period exceeding six years or during the lifetime of the person for whom the income is settled, and further, from which income the settlor derives no direct or indirect benefit."

In our view that passage correctly summarises the effect of the ird proviso to s. 16(l)(c).

The High Court was therefore right in holding that by virtue of the third proviso to s. 16(1)(c) of the Indian lncometax Act, 1922, the income received by the beneficiaries under the deed of trust other than the assessee could not until the power of revocation arose to the assesssee, be deemed to be the income of the assessee for the purpose of assessment to income-tax.

The appeal fails and is dismissed with costs.

Appeal dismiued.

COMMISSIONER OF INCOME-TAX, PATNA

RANI BHUWANESHWARI KUER

K. SUBBA RAO, J.

C. SHAH

Indian Income-tax Act, 1922

Tekari Raj

December 22. 1941

cl. 43

January

20, 1941

Clause 43

January 12, 1942

cl. 45

Darbhanga

Maharaj Kumar

Maharnj Kumar Gopal Saran Narain Singh

s. 16

Income-tax Act

s. 16

s. 16

Income-tax Act

s. 16

s. 16

N. D. Karkhanis

R. N. Sachthey

Sarjoo Prasad

B. D. Singh

D. Goburdhan

SHAH

J.-Rani Bhuwaneshwari Kuer

January 20, 1941

Shah

December 6, 1939

cl. 24

Maharajadhiraj

Maharaj Kumar Gopal Saran Narain Singh

Tekari

Maharaj Kumar Gopal

Shall

Saran Narain Singh

Indian Inoome-tax Act, 1922

s. 16

Income-tax Act

High Court of Judicature at Patna

s. 66(2)

s. 16

January 12,

1942

s. 16

s. 16

s. 16

Patna

s. 16(1)

September 18, 1946

January 20, 194

May 28, 1946

Bhubneshwari Hari Haresh Private Trust

cl. 43

cl. 45

s. 16(\)(c)

s. 16(l)(c)

Bombay High Court

Kania

s. 16(1)(c)

Section 16(l)(c)

s. 16(l)(c)

s. 16(1)(c)

Indian lncometax Act, 1922


1 s.c.n.

SUPREME COURT REPORTS 97

VRAJLAL MANILAL & CO.

UNION OF INDIA AND ANR.

IP. B. GAJENDRAGADKAR, C.J .• K. N. WANCHOO, J. c. SHAH,

N. RAJAGOPALA AYYANGAR ANDS. M. SIKRI, JJ.]

Mines and Minerals-State Government refuses to renew certificate of approval-Review ; petition to Central Government -Central Government receives report and information from the State Government behind the back of the appellants-Central Government acting quasi-iudiciaUy-Violation of natural justice -Mines and Minerals (Regulation and Development) Act, 1948 (No. XLIII of 1948)-Mines Concession Rules, 1949 rr. 57, 59.

The appellants constitute a partnership engaged in mining and they held a prospecting license as well as a certificate of approval from the State Government under the Mineral Concessions Rules, 1949 framed under the Mines and Minerals (Regula tion and Development) Act, 1948. The approval certificate was granted for one year and , until December 1955 it had been renewed from year to year when the State Government refused to renew it on the ground that the partners composing the firm had changed. Thereupcn the appellants applied under r. 57 of the -Minerals Concession Rules to the Union Government for the

review of the order of the State Government refusing to renew the certificate of approval. While this application was pending the Union Government corresponded with the State Government and gathered information and received the latter's remarks regarding the merits of the matter behind the appellants' back.

The request made by the appellants for copies of the correspondence and for an opportunity to be heard was refused by the Union Government. Ultimately the Union Government refused the review application on the ground that there was no valid ground to interfere with the decision of the State Government.

The present appeal was filed on special leave granted by this Court. On behalf of the appellants it was contended that the Union Government while disposing of an application under r. 57(2) in terms of r. 59 acts as a quasi-judicial authority and the order which was passed taking into consideration the report of the State Government behind the appellants' back and without affording a reasonable opportunity for presenting their case was contrary to natural justice and was therefore void.

 Held: (i) The Union Government when disposing of an application for review under r. 59 is functiolling as a quasi-judicial authority.

Shivji Nathubhi v. Union of India, [1960)' S.C.R. 775, relied on.

(ii) Though Shivji Nathubhai's case was concerned with a case where an order had been passed prejudicial to the respondents before the Central Government without affording them

LIP(D)ISCI-4 ..

March 10

SUPRE!VIE COURT REPORTS [1964]

1964 an opportunity to meet the case of an applicant for review the . -. same principle would apply even where a petition for review is VraJlal .Manila! 4' rejected based on materials which were not made available to

Co. the applicant for review.

T, Union J1 1tdia an.;

(iii) Applying the above principle to the present case the no " order of the Central Government is vitiated as being contrary to the principles of natural justice in that the decision wa" rendered without affording to the appellants a reasonable opportunity of being heard which is a sine qua non of a fair hearing.

.Ayyangar, J.

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 115 & 1I6 of I 963. Appeals by special leave from the .iudgment and orders dated July 9, 1958, September 24, 1958 of the Union of India (Ministry of Steel, Mines and Fuel, New Delhi) and the Punjab High Court (Circuit Bench) at Delhi respectively.

G. S. Pathak, Rameshwar Nath and S. N. Andie)', for the appellant (in both the appeals).

S. G. Patwardhan and B. R. K. G. Achar, for respondent No. 1 (in both the appi; als).

I. N. Shroff, for respondent No. 2 (in C.A. No. 116/1963).

March 10, 1964. The Judgment of the Court was delivered

AYYANGAR, J.-Civil Appeal No. 115 is by special leave granted by, this Court under Art. 136 of the Constitution and is against an order of the Union of India (Ministry of Steel, Mines and Fuel) dated July 9, 1958 rejecting an application filed by the appellants under rule 57 of the Mineral Concession Rules, 1949 to review an order passed by the Government of Madhya Pradesh rejecting their application for the renewal of the Certificate of Approval granted to them. The appellants filed a petition to the High Court Punjab under Art. 226 <if the Constitution praying for a writ of certiorari to quash the above order of the Unieln of India. This petition was dismissed by the High Court in /imine and Civil Appeal No. 116 of 1963 is by special leave of this Court against this order of the High Court, Punjab. It would thus be seen that both the appeals are directed to challenge the validity of the same order and we shall therefore deal with them together.

The appellants, who constitute a partnership, are engaged inter alia in the business of mining and they held a prospecting licence in the State of Madhya Pradesh. They hold concessions in regard to prospecting and working minerals in seviraJ areas of the State to the details of which it is not necessary to refer.

Under the scheme of the Mines and Minerals (Regulation and Development) Act, 1948 (Act No. XLIII of 1948) and the Mineral Concession Rules, 1949 framed thereunder, in order that a prospecting licence may be granted to a person he has

to hold a certificate of approval from the State Government 1964 concerned and similarly the rules provide that no mining lease vrajlal Manila! "' shall be granted to any person unless he held a similar certifi- Oo. cate of approval. To enable them to do the prospecting in lands u . if] d'

1111 in which they had obtained mineral concessions, the appellants nion no7h,';' • applied for and obtained from the Government of Madhya Pradesh a certificate of approval under the Mineral Concession Ayyangar, J.

Rules from 1952 onwards. The duration of the certificate is one calendar year and the same has to be renewed every year, if it is to be in force. The original certificate granted to the appellants for the year 1952 was being renewed from year to year and as a result they held a valid certificate of approval up to the period ending on December 31, 1955. Being desirous of having the same renewed for the following calendar year 1956 they made an application to the Government of Madhya Pradesh on November 22, 1955. The information required by the form of application prescribed by the rules was furnished and the necessary documents were filed and this application was recommended by the District Officer, Bhandara. The State Government. however, by an order dated September 21, 1956 rejected the application, the reason given being that the partners composing the firm had changed. This order was communicated to the appellants on October 6, 1956 and thereupon the appellants made an application on November 15, 1956 to the Union Government for a review of the order of the State Government under rule 57 of the Mineral Concession Rules ..

Rule 57(2) which was invoked by the appellants provides:

"Where a State Government has failed to dispose of an application for grant of renewal of a certificate of approval or prospecting licence or a mining lease within the period prescribed therefor in these Rules, such failure shall, for the purpose of these rules, be deemed to be a refusal to grant or renew such certificate, licence or lease, as the case may be, and any person aggrieved by such failure ma.y, within two months of the expiry of the period aforesaid, apply to the Central Govermnent for reviewing the case." The procedure for review is laid down by rule 59 which reads:

"Review-Upon receipt of such application, the Central Govermnent may, if it thinks fit, call for the relevant records and other information from the

Sta.te Govermnent, and after considering any explanation that may be offered by the State Government cancel or revise the order of the State GOIVermnent, or pass such order as the Central Government may deem just and proper."

L/P(D)ISCI--41•)

Vrajlal Manilal Ja

Co. v.

Union of India an!l

A:notker

Ayyangor, J.

Thereafter correspondence seems to have ensued between the Central Government and the Government of Madhya Pradesh in regard to the propriety of granting the application for review. The appellants having come to know from a letter addressed to them by the Government of India that the State Government had been required to send a report of their remarks in connection with their application for review made enquiries as to what had happened and also requested that they might be informed as to the progress of their application and that they might be given an opportunity of a personal hearing at which they would be able to satisfy the Government about the genuineness of their case. Some portions of this correspondence between the Government of India. and the Government of the State as to the merits of the appellants' application are now on record but it is common ground that the appellants were not informed of these documents prior to the O'fder now impugned rejecting the applica.tion for review was passed. On July 9, 1958 the application of the appellants was rejected by the Union Government, the order stating:

"The Central Government have come to the conclusion that there is no valid ground for interfering with the decision of the Government of Madhya Pra- ,. desh rejecting your application for renewal of a certificate of approval for the year 1956."

The appellants thereafter applied to the Government of India requesting for a copy of the report of the State Government on the basis of which the application was rejected. The reply that the appellants received was that the Government of India regretted their inability to accede to their request. It is the validity of this order dated July 9, 1958 that is challenged in appeal No. 115 of 1963.

Mr. Pathak, learned Counsel for the appellants, submitted that the Union Government when disposing of an application under s .. 57(2) in terms of rule 59 is acting.as a quasi-judicial a.uthority and the order which was passed taking into consideration the report of the State Government and without their knowing the contents of the report and without affording them a reasonable opportunity of presenting their case was contrary to natural justice and was therefore void. In this connection learned Counsel relied on the decision of this Court: Shivji Nathubhai v. The Union of India('). Mr. Pa.thak is well-founded in his submission as to the nature of the jurisdiction exercised by the Union Government when disposing of an.application for review under Rule 59 and the decision referred to does

(') [1960] 2 S.C.R 775.

support him that the Central Government acting under the rule 1964 referred to is functioning as a quasi-judicial authority. It does v 'lal 11!1 1.,,. follow therefore that they could not act on the basis of material rai i.~· • as regards which the appellants had no opportunity to make . v. . their representation. No doubt, the decision in Shivji Nathu- Union ';{;, f;: and bhai v. The Union of India and Ors.(') was concerned with a case where an order had been passed prejudicial to the respon- Ayyangar, J. dents before the Central Government without affording them an opportunity to meet the case of an applicant for review but the same principle would, in our opinion, apply even where a petition for review is rejected based on materials which were not made available to the applicant for review.

As we have already indicated, the State Government had refused renewal of the certificate of approval because they considered that there had been a change in the composition of the firm which destroyed its identity. On the other hand, the case of the appellants was that the terms of the partnership deed made express provisions for the continuance of the identity of the firm. notwithstanding changes in the persons composing the firm by death, retirement or because of the accession of new members to replace deceased or retiring partners or even otherwise. If the report of the State Government made any points against the representations made by the appellants, and these were being taken into consideration by the Union Government, in common fairness, the appellants were entitled to be informed as to what these were and an opportunity to point out how far they militated against the contentions raised by them.

Learned Counsel for the respondent-Union of India, did not seek to support the position taken by the Central Government that they were justified in refusing to disclose the contents of the report they obtained from the Sta.te Government . which afforded them the factual basis on which they rejected the application for review. We have therefore no hesitation in holding that the order of the Central Government now under

ppal i~ vitiated as be!1Jg contrary to the principles of natural 1usttce, m that the dectsion was rendered without affording to the appellants a reasonable opportunity of being heard which is a sine qua non of a fair hearing.

The learned Judges of the Punjab High Court dismissed the petition filed before them under Art. 226, apparently because they proceeded on the view that the exercise of jurisdiction of the Central Government under rules 57 and 59 of the Mineral Concession Rules was really administrative in character so that the reasonable opportunity that is an essential requisite of quasi-judicial procedure was not attracted to the

(') [1960] 2 S.C.R. 775.

1964 case. That was the view taken by that Court in the Shivji Nathubhai v. The Union of India and Ors.(') which decision Vrajl<ll '1t~'.' 1" 1 "' was reversed by this Court. It might be mentioned that the v. decision of this Court was rendered subsequent to their judg- Uaim• 01 Ii. T; a ani ment now under appeal and therefore the learned Judges had

A11nfhtr not the advantage of the pronouncement of this Court.

Ayyang((r, J.

The result is that the appeals are allowed and order of the Central Government dated July 9, 1958 and of the High Court dated September 24, 1958 are set aside. The Central Government will consider the review application afresh and dispose of the same in accordance with law and in the light of the observations contained in this judgment. The appellants are entitled to their costs in this Court (Hearing fee one set).

Appeals allowed.

97

VRAJLAL MANILAL & CO

UNION OF INDIA AND ANR

IP. B. GAJENDRAGADKAR, C.J

K. N. WANCHOO, J.

c. SHAH

Mines Concession Rules, 1949

Minerals Concession Rules

Union Government

Shivji Nathubhai

Central Government

.Ayyangar

July 9, 1958

September 24, 1958

G. S. Pathak

Rameshwar Nath

S. N. Andie

S. G. Patwardhan

B. R. K. G. Achar

I. N. Shroff

AYYANGAR

Art. 136

Union of India

Mineral Concession Rules, 1949

Government of Madhya Pradesh

High Court Punjab

Art. 226

High Court, Punjab

Madhya Pradesh

Mineral Concession Rules, 1949

November 22, 1955

Bhandara

September 21, 1956

October 6, 1956

November 15, 1956

Union Government

Vrajlal Manilal Ja

Union of India

Government of India

Government of the State

Government of Madhya Pra-

Pathak

Pa.thak

[1960] 2 S.C.R 775

Shivji Nathu- Union

Ayyangar

Art. 226

[1960] 2 S.C.R. 775

Ayyang((r


.S S.C.R.

SUPREME COURT REPORTS 121

in principle is disclosed. Where on a consideration of the 196'# circumstances, payment is made to compensate a person Kettlew-; u-Bullen

for cancellation of a contract which does not affect the and Co. v. trading structure of his business, nor deprive him of what

CJ.T. in substance is his source of income, termillation of the Shah 1• -contract being a normal incident of the business, and such

cancellation leaves him free to carry on his trade (freed from tbe contract terminated) the receipt is revenue: Where by the cancellation of an agency the trac! ing structure of the assessee is impaired, or such cancellation results in loss -Of what may be regarded as the source of the assessee's income, tbe payment made to compensate for cancellation of the agency agreement is normally a oapital receipt.

In the present case, on a review of all the circumsc:mces, we have no doubt that what the assessee was paid was to compensate him for loss of a capital asset. It matters little whether the assessee did continue after the determination of its agency with tbe Fort William Jute Co. Lid to conduct the remaining agencies.

The transaction was not in the nature of a trading transaction, but was one in which the. assessee parted with an asset of an enduring value.

We are, therefore, unable to agree with the High Court that the amount received by the appellant was in the nature of a revenue receipt.

We accordingly record the answer on the question submitted by the Tribunal in the negative.

The appellant would be entitled to its costs in this Court.

GILLANDERS ARBUTHNOT AND CO., LTD. v.

THE COMMISSIONER OF INCOME-TAX, CALCUTTA

(K. SUBBA RAO, J. c. SHAH AND S. M. S!KRI, JJ.)

Income Tax-Capital or revenue-Termination of agencY-Compensa~ tion-Business of several agencies-Cancellation of single agency-

Nature of compensation.

The appellant company was carrying on business in diverse Jines as managing agents of some concerns, distributing agents of others and u secretaries of still other class of concerns. It also dealt as an ex-

May I.

Gillanders Arbuthnot and Co.

"· C.l.T.

Shah J.

porter and importer. shipping agent, and as buyer and dealer in dive""

commodities. A large amount of business wu done by the appellant as an agent of foreign companies in respect of different kinda of goods.

In respect of explosives manufactured by the Imperial Chemical Industries (Export) Ll'd .• Glasgow, Scotland, the appellant wu acting u the sole agent and distributor of that company. The agency agreement was terminable at the option of the principal company, and by a Jetter dated March 11, 1947. the latter informed the appellant that the agency would stand terminated from April I, 1948 and that compensation would be paid for termination of the agency.

The appellant was be paid an amount which was computed on the basis of the profits of the business.

In the course of the proceedings 'for asaessment to income-tax appellant claimed that the amount was received on determination of the agency being receipt of a capital nature and was not liable to be included in total income of the appellant, but the Incometax Officer rcjcctett the claim holding that cancellation of a single contract of agency out of a number of selling agencies held by the appellant was in the ordinary course of business and that the sum received as compensation was revenue taxable under the Indian Income-tax Act, 1922 .

. Held: Having regard to the vast array of business done by the appellant as agents, the acquisition of agencies was in the normal course of business and the determination of individual agencies, a normal incident, could not affect or impair the trading structure of the appallant, nor involve a loss of an enduring trading asset. and the compensation received by the appellant, therefore, did not represent the price paid for loss of a capital asset but only a payment made for the loss of profit it suffered by the cancellation of its agency and was income chargeable to the income-tax.

CIVIL

APPELLATE

JURISDICTION: Civil Appeals Nos. 825-828 of 1963.

Appeals from the judgment and order dated January 10, 1962, of the Calcutta High Court in Income-tax Reference No. 33 of 1957.

B. Sen, P. K. Chatterjee and D. N. Gupta, for the appellant.

K. N. Rajagopal Sastri and R. N.

Sachthey, for the respondent.

May 1, 1964. The Judgment of the Court was delivered by

SHAH, J.-The appellant which is a public limited com pany incorporated under the Indian Companies _Act, 1913, has its registered office at Calcutta, and branches m Bo.mbay, Madras, New Delhi and Kanpur. The appellant earned on

business in diverse lines, which may broadly be classified as 1964

(1) buying and selling on its own account, ( 2) introducing Gilland;;;- Arbucustomers to principals ( 3) acting as managing agents, ( 4) thnot and Co. acting as shipping agents, ( 5) acting as purchasing agents, c.1:T. ( 6) acting as sole importers and distributors on behalf of Ullited Kingdom principals liaving no organisation in India and ( 7) acting as secretaries.

Since January 21, 1886, M/s. Gillanders Arbuthnot & Co. predecessors-in-interest of the appellant were the sole agents and distributors in India of explosives manufactured by the Imperial. Chemical Industries (Export) Ltd. Glasgow, Scotland, hereiaaftet called 'the principal company'. There was no written agreement between the principal company and M/s Gillanders Arbuthnot & Co. incorporating the terms of the agency agreement. It is however coriimon ground that the agency agreement was terminable at the option of the principal company. The appellant was incorporated for taking over the business of M/ s Gillanders Arbuthnot & Co. and since it took over the "distributing agency the appellant acted as the sole agent and distributor of explosives manufactured by the principal company, but without a written agreement.

In May 1945 the principal company desired to set up its own organisation for distributing its products, and intimated the appellant that the agency of the appellant may be cancelled after two or three years. By letter dated March, 11, 1947, the principal company informed the appellant that the agency will stand terminated from April 1, 1948, and that it desired to compensate the appellant for termination of the agency on the following basis: ( 1) "For the first three post-transfer years" the principal company shall pay to the appellant two-fifths of the commission accrued on actual sales in the territory of the latter's agency taken over the principal company, such commission to be computed at the commission rates formerly paid to the appellant;

(2) That "in the third post-transfer year", the principal company shall pay the appellant in

Shalt J.

Gillander1 Arbu

thnot and Ct>.

C.l.T

Shah I.

addition a sum equivalent to full commission on the sales for that year effected by the principal company in the appellant's territory calculated at the same rates.

( 3) That payments would be made to the appellant after the end of each year as soon as the amount due was ascertained.

Certain other matters in the letter which have a bearing on the dispute, may be reproduced:

"For the purpose of calculating the commission due to you, the post-transfer will be deemed to run as from the date of the transfer of your agency to Imperial Chemical Industries (India) Ltd., We trust that you will find these proposals acceptable.

As a condition of our paying you compensation on the basis outlined above, we would request you to be good enough to give us a formal undertaking to refrain from selling or accepting any agency for explosives or other commodities competitive with those covered by the agency agreement now being terminated.

In this connection, we are asking our Legal Depart

ment to prepare a formal agreement which we will submit to you for signature as soon as possible."

It is common ground that no ormal agreement in writing, which was contemplated to be taken from the appellant, was executed: not even a draft of the agreement was submitted by the principal company to the appellant.

Pursuant to conditions (1) and (2) incorporated in the letter dated March 11, 194 7, which have been set out earlier, the appellant received the following amounts from the principal company

I !

1964 For the previous year corresponding to the asscsment year ending 31st March, 1949. .. .... Rs. 1' 53'47l/II/- Gilland;;:;- Arbuthnot and Co. v.

For the previous year corresponding to the assessment yrar ending 31st March, 1950. .. .... Ro. l,59,>71/4/-

C.1.T.

For the previous year corresponding to the assessment year ending 31st March, 1951 ...... Rs. 6,20,131/2/-

These amounts were included in its profit & loss account by the appellant as commission received by it.

But in the course of the proceedings for assessment to income-tax and Business Profits Tax, the appellant claimed that the amounts

we:e compensation received on determination of the agency being receipts of a capital nature and were not liable to be included in the total income of the appellant. The Incometax Officer, Companies District IV, Calcutta, rejected the contention of the appellant, holding that cancellation of a single contract of agency out of a riumber of selling agencies held by the appellant was in the ordinary course of business and the sums received by the appellant as compensation for

f ancellation were revenue, taxable under the Indian Incomet ax Act, 1922. The Income-tax Officer also assessed the

l elevant amount of compensation to Business Profits tax for the chargeable accounting period ending March 31, 1949.

In appeal to the Appellate Assistant Commissioner, the contention of the appellant was accepted principally on the ground that the amounts received by the appellant were compensation for termination of the agency with the principal company and as consideration for agreeing to refrain from carrying on in future competitive business in explosives.

The Appellate Tribunal held that the_ compensation received by the appellant was merely incidental to the carrying on of the business. The Tribunal negatived the contention of the appellant that the explosives agency was a separate business or that termination of that business amounted to loss of an enduring asset. The Tribunal also held that the covenant referred to in the letter dated March, 11, 194 7, about the appellant agreeing to refrain from carrying on a competitive business in explosives did not form consdera tion for the amount paid, because although proposed m the

Shah J.

~ ldter dated March 11, 1947, there was no formal acceptance Gilland.,• Arbu- <>f the offer or an undertaking in writing given by the

thnot and Co. appellant agreeing not to carry on a competitive business. v.

C.1.T. 'Jn the view of the Tribunal the offer relating to the under- Shah 1. talcing not to carry ori a competitive business contained in the letter was not accepted, and. the amounts paid by the principal company could not therefore be regarded as forming consideration partially or wholly for acceptance of that offer.

The Tribunal thereafter referred three questions under s. 66 ( 1 ) of the Indian Income-tax Act, 1922 to the High Court of Judicature at Calcutta. These questions were:

( 1) Whether the assessee's agency of the Imperial Chemical Industries (Export) Ltd. was a separate business by itself, the closure of which resulted in the destruction of a capital asset of the assessee;

(2) Whether on the facts and in the circumstances

of this case, the compensation sums received by the assessee from the Imperial Chemical Industries (Export) Ltd. are income chargeable in the hands of the assessee; and

(3') Whether on the facts and in the circumstances of this case no part of the compensation money was received by the assessee on the condition not to carry on a competitive business in the same line of activity in explosives and as such no part of the money was in the nature of capital being exempt from Indian Income-tax levy?

The High Court recorded answers to the question as follows:

"Qu;:.; tion 1.-The assessee's agency of the Imperial Chemical Industries (Export) Ltd. was not a separate business by itself and th~ closure of this business did not result in the destruction of a capital asset of the assesee.

Question 2.-The amounts of compensation received !964 by the assessee from the Imperial Chemical Gilllin;;;;"Arbu Industries (Export) Ltd. were income chargethnot and Co. v. able in the hands of the assessee. c.1. r.

Question 3.-No part of the compensation money was received by the assessee on condition not to carry on a competitive business in explosives and consequently no part thereof was exempt from Indian Income-tax levy."

With certificate of fitness granted by the High Court, these appeals have been preferred by the appellant.

The principal question in dispute is whether the amount received by the appellant as compensation for loss of agency are of the nature of capital or revenue. It is necessary in the first instance to eliminate two subsidiary contentions raised by the appellant. It was urged that the amounts received by the appellant were in lieu of compensation for cancellation of the agency by the principal company, for Joss of goodwill of the appellant's business, and also in consideration of the appellant's agreeing not to carry on any competitive business in explosives or other commodities in which business was carried on by the appellant under the agency agreement.

It cannot seriously be disputed that compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of which the agency was terminated, or for loss of goodwill would, prima facie, be off the nature of a capital receipt. But there is no evidence that compensation was paid to the appellant as consideration for giving the undertaking not to carry on a competitive business, or as compensation for loss of goodwill.

In the letter dated March 11, 194 7, it was expressly recited that as a condition of payment of compensation on the basis outlined therein the principal company had called upon the appellant to give a formal undertaking to refrain from selling or accepting any agency for explosives or other commodities competitive with those covered by the agency agreement, but no such formal undertakin~ was ever given.

It was recited in the last paragraph of the letter that the prin

Shah/.

SUPREME COURT REPORTS [rgp4J

1'6'1 cipal company will submit a fonnal agreement to the ap- Gillandm Arbupellant for execution. But it appears that at the time of thnot and Co. payment of the compensation and thereafter also both sides cJ:T. ignored this condition. Payment of compensation was

Shah J. spread over a period of three years, but that will not give rise to an inference that the object behind the payment was. to enforce the undertaking, for the undertaking, if any, would have operated pennanently whereas full compensation was payable within three years. If importance was attached to the undertaking the principal company would have declined to make even the first payment without insisting upon a fonnal agreement incorporating the undertaking.

Whether the appellant did not in fact carry on any competitive business was never investigated, and the absence of evidence on that point may reasonably justify the inference that the appellant never attempted to establish that part of its case. Granting that an agreement to refrain from carrying on a competitive business may be implied from subsequent c.onduct, in the absence of any material at any stage of the proceedings before the Revenue authorities, it would be reasonable to hold that the .appellant did not place any reliance upon the case that part of the compensation was attributable to an undertaking not to engage in competitive business.

No part of the compensation may be attributed to loss of goodwil! suffered by the appellant. It is true that the agency had continued in the hands of the predecessors of the_ appellant and thereafter with the appellant for upwards of sixty years.

It was urged that an extensive market had been built up in India and the goodwill of that business was on termination of the appellant's agency taken over by the new agents of the principal company and compensation paid in _that behalf must be regarded as

capital.

But this question also was never raised before the Revenue authorities, nor even before the Tribunal.

The Tribunal observed that it had not been supplied with "any

material regarding the basis of the value of the goodwill, nor anything to indicate as to what the written down value of the goodwill was, due to the tennination of the agency".

It therefore held that the inference sought to be drawn by 1964 the appellant that compensation was referable to the Joss Gilland;;;-A.rbuof goodwill, was based on no evidence and the High Court thnot •M Co. agreed with that conclusion.

We are unable to hold that cir. the High Court was, in so holding in error. If it was the case of the appellant that a part of the compensation was in fact paid for loss of goodwill of the business, the appellant couid have led evidence to establish hat it was the intentioo of the parties that the loss of good will was to be compensated by payment of an amounit which was included in the compensation ultimately paid by the principal company to the appellant.

The business of agency had undoubtedly continued for more than sixty years, but there is no evidence about the terms of the agency agreement. There was no written agreement, and it is common ground that tl1e agency was terminable at will.

The principal company had, as early as 1945, informed the appellant that the distribution arrangement "would be terminated after two or three years". The appellant had sufficient notice of the proposed determination.

Thereafter the agency was cancelled with effect from April 1, 1945, and in -the correspondence which is tendered in evidence, there is not even an indirect reference to any negotiation for payment of Compensation for loss of goodwill, or any agreement in that behalf.

We may now address ourselves to the question, whether eompensation paid by the principal company for cancellation of the agency may be regarded as a capital or revenue receipt. We have in a recent case in Kettlewell Dullen & Co.

v. The Commissioner of Income-tax;·· Calcutta ( 1) made a survey of the important cases which have arisen before the Courts in the United Kingdom and in India about the principles which govern the determination of the nature of compensation received on the termination of an agency. We , observed in that case:

"On an analysis of these cases which fa!! on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed.

Where ------

(1)( 1964] S.C.L 93.

SI S.C.-9

Sluih J.

Gillandera Arb11thnot and Co.

C.1.T. s•11 1.

on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue: where by the cancellation ef an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt."

Examining the circumstances of the present case in the light of that principle, we agree with the High Court that what was received by the appellant was income and not capital.

Compensation received by the appellant for cancellation of the agency which was terminable at will, the appellant wasto be paid an amount which was to be computed on the basis of the profits of the business. Under the letter dated March 11, 194 7, the appellant was to be paid "for the first three post-transfer years" two-fifths of the commission accrued on actual sales in the territory of the appellant's agency taken over by the Imperial Chemical Industries

<India) Ltd., such commission to be computed at the rates of commission formerly paid to the appellant, and that in "the third post-transfer year" the princip2l company was to

pay the appellant in addition a sum equivalent to full com- mission on the sales for that year effected by the Imperial C::hemical Industries (India) Ltd. in the appellant's territory calculated at the same rates.

The appellant was conducting business as selling or distributing agent of numerous principals.

The agency which was terminated was one of many such agencies in which the appellant functioned as distributing agent of a

foreign principal. There is not even a suggestion, that by the determination of the agency held by the appellant in Gillandm ..4rb11explosives from the principal company, the trading structure thnot and Co.

Y. of the assessee's business was impaired. It is manifest that C.l.T. the agencies of the companies conducted by the appellant sw J must hv~ been obtained at different times.

There is no evidence that these agencies were of any fixed duration. It would be reasonable to infer that some of the agencies may be cancelled and fresh agencies obtained. The list t.; rnishtd by the appellant before the Tribunal, ana1ysing the different classes of business carried on by it d1scbsed that the business was done in many lines.

The appellant acted as managing agent of some concerns, distributing agent of 'others. and as secretary of still other class of concerns.

Again it dealt as an exporter and importer, shipping agent, and as a buyer and dealer in diverse commodities. A large amount of business was done by the. appellant as an agent of foreign companies. The appellant had obtained agencies for paints, varnishes, petroleum, kerosene oil, medicines and toilet preparations, cement, timber, stationery, metals, tea, engineering goods, air-conditioning equipment and a large number of other commodities. It may reasonably be held, having regard to the vast array of business done by the appellant as agents, that the acquisition of agencies was .in the normal course of business and determination of individual agencies, a normal incident, not affecting or impairing the trading structure of tl!e appellant. The appellant was compensated by payment to it the loss of profit it suffered by the cancellation of its agency, leaving it free to conduct its remaining business.

It was said that the appellant had employed expert officers who were accustomed to handle explosives which are a specialised commodity and the cancellation of that agency seriously affected the organization of its trading operations.

Bl.!: foe appellant was undoubtedly dealing in several kinds of infl2mmable substances, such as, petroleum, kerosene oil, timber and similar other commodities.

It is true that explosives would require great care in handling.- It appears, however, that eighty per cent of the staff attached to the Magazine Section was maintained not at the expense of the

~ appellant, but at the expense of the principal company. Out GUlandm .A.rbuof the officers who were attached to the explosives business, thnot and c,,. services of five officers were taken over by the principal

cJ.r. company and six others were retained by the appellant and

Slllzh I. absorbed in other branches.

It cannot, therefore, be said that termination of the agency resulted in impairment of the trading organisation of the appellant. One of the agencies was undoubtedly lost to the appellant, and even temporary dislocation in the organisation of the business thereby may oe assumed. There is no evidence, however, that the appellant could not in the ordinary course of business repair the dislocation. There is no evidence that it could not obtain an agency from another manufacturer of explosives.

Even assuming that such an agency in explosives may not be replaced, that circumstance by itself may not justify the inference that the agency was independent of the other lines of business conducted by the appellant, or that by the cancellation "of the agency an enduring asset was lost to the appellant. The circumstance that the agency was determinaJil~ at the will of the principal company which maintained a large staff at their expense justifies the inference that upon cancellation of that agency the appellant's business organization was not substantially impaired. The cancellation, it may be held, was an incident of the trading operations of the appeallant in the normal course of business.

The payment received by the appellant could not, therefore, be regarded truly as compensation for not carrying on the business: it was a sum which was worked out in terms of profits which the appellant would have earned during the period of notice and paid in the ordinary course of brisiness to adjust the relations between the appellant and the principal company.

There is, in our judgment, no immutable principle that compensation received on cancellation of an agency must always be regarded as capital. In each case the question has to be determined in the light of the attendant circumstances.

In the judgment in Kettlewal/ Bullen and Co.'s case (1) we have explained that the judgment of the Judicial Committee in the Commissioner of Income-tax v. Shaw < ) [ 1964! sis.c.R. 93.

Val/ace and Co.(') was not intended to, and did not lay Jown that in every case, cancellation of an agency resulted Gillandm A.rb1 in loss of a source of revenue or that amounts paid to cornthnot :nd Co. pensate for loss of agency must be regarded as capital loss. ciT.

On a careful consideration of all the circumstances we agree with the High Court that cancellation of the comracr of agency did not affect the profit-making structure of the appellant, nor did it iinvolve a loss of an enduring trading

asset; it Iljerely deprived the appellant of a trading avenue, leaving him free to devote his energies after the cancellation to carry on the rest of the business, and to replace the contract lost by a similar cpntract. The compensation paid, therefore, d.id not represent 'the price paid for loss of a capital asset.

We therefore dismiss the appeals with costs.

Appeal dismissed.

MASALTI

STATE OF U. P.

(P. B. GAJENDRAGADKAR, C.J., K. N. WANCHOO. K. c. DAS

GUPTA AND RAGHUBAR DAYAL, JJ)

Criminal Appeal-Appeal by special leave-Scope-Murders committed by village faction constituting unlawful assembly-Sentence of death, if and when can be pas.Jed-Apprecilztion of evidence-T11t -Validity Prosecution-It must examine all witnesses cited.

Forty persons belonging to a village faction and constituting an unlawful assembly were put up on trial before the Ad'ditional Sessions lodge under s. 302 read with s. 149 of the Indiao Penal Code and other sections thereof for murdering 5 persons of the other faotion with gun1.

The trial lodge found 35 of them illy and sentenced 10 of them. who carried fire arms, to death and the rest to imprisonment for life. Three appeals were preferred by the convicted persons to the High Court anll !he sentences of death came up for confirmation under s. 374 of the

(I) L.R. 59 I.A. 206,

Shllh /.

lPM

May,4

termillation of the Shah

GILLANDERS ARBUTHNOT AND CO., LTD

K. SUBBA RAO

c. SHAH

S. M. S!KRI

March 11, 1947

Income-tax Act

Calcutta High Court

B. Sen

P. K. Chatterjee

D. N. Gupta

K. N. Rajagopal Sastri

R. N.

Sachthey

SHAH

Calcutta

Madras

New Delhi

Kanpur

Ullited Kingdom

India

January 21, 1886

Gillanders Arbuthnot & Co.

Gillanders Arbuthnot & Co.

March, 11, 1947

April 1, 1948

March 11, 194 7

Indian Incomet ax Act, 1922

March 31, 1949

March, 11, 194 7

s. 66

Indian Income-tax Act, 1922

High Court of Judicature at Calcutta

Joss Gilland;;;-A.rbuof

April 1, 1945

Kettlewell Dullen & Co.

Commissioner of Income-tax;·· Calcutta

United Kingdom

Sluih

Kettlewal/ Bullen and Co.

MASALTI

STATE OF U. P.

P. B. GAJENDRAGADKAR

K. N. WANCHOO

DAS

GUPTA

RAGHUBAR DAYAL

s. 302

s. 149

Penal Code

s. 374

L.R. 59 I.A. 206