.April 6

646 SUPREME COu"'RT REPORTS [19641

D. C. DEWAN MOHIDEEN SAHIB AND SONS

v .

THE INDUSTRIAL TRIBUNAL, MADRAS

[P. B. GAJENDRAGADKAR, C. J., K. N. W ANCHOO AND K. C.

DAS GUPTA, JJ.]

Industrial Dispute-Employer and Emp!oyee-Relaticnship -Depends upon circumstances of each case.

On a reference of industrial disputes between the appellants, the proprietors of bidi concerns, and their workmen, the appellants contended before the Industrial Tribunal that the workers in question were not their workmen but were the workmen of independent contractors. The Tribunal found on the basis of evidence led, that the modus operandi was that contractors took leaves and tobacco from the appellant and employed workmen for manufacturing bidis. After bdis were manufactured, the contractors took them back from the workmen and delivered them to the appellants. The workmen took the leaves home and cut them there; however the process of actual rolling by filling the leaves with tobacco took place in what was called contractors' factories.

The contractors kept no attendance register for the workmen, there was no condition for their coming and going at fixed hours, nor were they bound to come for work every day: sometimes they informed the contractors if they wanted to be absent and some times they did not. The contractors said that they could take no action if the workmen absented themselves even without leave. The payment was made to the workmen at piece rates after the bidis woere• delivered to the appellants. The system was that the appellant • paid a certain sum for the manufactured bidis, after deduct ing therefrom the cost of tobacco and the leaves already fixed. to the contractors who in their turn paid to the workmen, who rolled bidis, their wages. Whatf)ver remained after paying the workmen would be contractors' 'commission for the work done.

The Tribunal held that there was no sale either of the raw materials or of the finished products, for, according to the agreement, if the bidis were not rolled, raw materials had to te returned to the appellants and the contractors were forbidden from selling the raw materials to anyone else. Further the manufactured bidis' could only be delivered to the appellants who Siu.pplied the ra~N materials. Further price of ra\\" materials and finished products fixed by the appellants always remained the same and never :fluct11ated according to market rate. The Tribunal concluded that the bidi workers ""re the employees of the appellants and not of the so-called contrac- • tors who were themselves nothing more then employees o-· branch managers of the appellants. Thereupon, the appellants filed writ petitions in the High Court, which held that neither the bidi roller nor the intermediary was an employee of tho appellants and allowed the writ petitions. On appeal by the workmen the appeal court allowed the appeal and restored the order and conclusion of the Tribunal.

On appeal by certificate: Held: On the .facts found the appeal court w•is right in holding that the conclusion reached by the Tribunal that the intermediaries were merely branch managers appointed by the

7 S.C.R.

SUPREl\IE COUHT REPOHTS 647

management and the relationship of employers and employees subsisted between the appellants and the bidi rollers was correct.

Dharangadhara Chemical Works Ltd., v. State of Saurashtra, [1957] S.C.R. 152, Shri Chintsman Rao v. State of Madhya Pradesh, (1958] S.C.R. 1340, Shri Birdhiclwnd Sharma v. First Civil Judge Nagpur, [1961] 3 S.C.R. 161, Shankar Ba!a.ji Waje

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 721 and 791 of 1963.

Appeals by certificate and special leave from the judgment and order dated February 16, 1962 of the Madras High Court in Writ Appeals Nos. 16 and 15 of l 959 respectively.

V. P. Raman and R. Gmwpathy Iyer, for the appellant lin C.A. No. 721 of 1953).

G. B. Pai, J. B. Dadachanji, 0. C. Mathur and Ravinder Narain, for the appellant lin C.A. No. 791/63).

T. S. Venkataraman, for the respondent No. 2 (in both the appeals).

April 6, 1964. The Judgment of the Court was delivered by

196l

D.O. Dewa" lll ohidcen Sahib

and Sons

The Ind11 . .strial Tribitnal, Madrm

WANCHoo; J.-These two appeals by special leave raise Wam:hoo, J. a common question and will be decided together. The appel !ants are proprietor:> of two bidi concerns. A reference was made by the Government of Madras of dispute between the appellants and their workmen with respect to three matters.

In the present appeals however we are concerned with only one matter, namely, whether reduction of annas two in the wages of worker;; employed under the agents of the appellants • was justified and to what relief the workers were entitled.

The contention of the appellants before the tribunal was that the workers in question were not their workmen and therefore there being no relation of employers and employees be.tween them and the workmen, the reference itself was incompetent and there could be no industrial dispute between them and the workmen concerned, their case being that the workmen concerned were the workmen of independent contractors.

It was found by the tribunal on the basis of evidence led before it by both parties that the modus operandi with respect to manufacture of bidis in the appellants' concerns was that contractors took leaves and tobacco from the

appellant~ and employed workmen for manufacturing bidis.

After bid, is were manufactured, the contractors took them back fro:n the workmen and delivered them to the appellants.

D.C. lJltoan M oltidetn Sa/1£b

and 8cnt8

The lnd1tstrial Tribunal, Madras

Wanclwo, J,

The workmen took the leaves home and cut them there; however the process of actual rolling by filling the leaves with tobacco took place in what were called contractors' factories.

The contractors kept no attendance register for the workmen.

There was-also no condition that they should come and go at fixed hours. Nor were the workmen bound to come for work every day; sometime.-; the workmen informed the contractors if they wanted to be absent and sometimes they did not. The contractors however said that they could take no action if the workmen absented themselves even without leave. The payment was made to the workmen at piece rates. After the bidis were delivered to the appellants payment was made therefor.

The system was that the appellants fixed the price of tobacco and leaves supplied to the contractors who took them to the places where work 9f rolling was done and gave them to the workmen. Next day, the manufactured bidis were taken by the contractors to the appellant:; who paid a certain price for the manufactured bidis after deduct- . ing therefrom the cost of the tobacco and the leaves already fixed.

The balance was paid to the contractors who in their turn paid to the workmen, who rolled bidis. their wages.

Whatever remained after paying the workmen would be the contractors' commission for the work done. It may also be mentioned that there were written agreements on the same pattern between the appellants and the contractors in that behalf. though no such. agreement has been printed in the paper books.

On these facts the appellants wanted to make out a case as if there was a sale of leaves and tobacco by the appellants to contractors and after the bidis were rolled there was a resale of the bidis to the appellants by the contractors. The tribunal however held that it wa.s clear that there was no sale either of the raw materials or of the finished products. for, according to the agreement, if bidis were not rolled, raw materials had to be returned to the appellants and the contractors were forbidden from selling the raw materials lo any one else.

Further after the bidis were manufactured they could only be delivered to the appellants who supplied raw materials and not to any one else.

Further price of raw materials fixed by the appellant; as well as the price of the finished products always remained the same and never fluctuated according to market rates. The tribunal therefore concluded that there was no sale of raw materials followed by resale of the finished products and this system was evolved in order to avoid regulations under the Factorirn Act. The tribunal also found that the contractors generally got only annas two per thousand bidis for their trouble. The tribunal

also referred to a clause in the agreement that the appellants would have no concern with the workers who rolled bidis for whom only the contractors would be responsible.

But it was of the view that these provisiorn were deliberately put into the agreement by the appellants to escape such statutory duties and obligatiom as may lie on them under the Factories Act or under the Madras Shops and Establishments Act.

Finally on a review of the entire evidence, the tribunal found that this 1; ystem of manufacture of bidis through the so-called contractors was a mere camouflage devised by the appellants.

The tribunal also found that the contractors were indigent persons and served no particular duties and discharged no special functions.

Raw materials were supplied by the appellants to be manufactured into tin"hed products by the workmen and the contractors had no other function except to take the .raw materials to the workmen and gather the manufactured material.

It therefore held that the so-called contractors were not independent contractors and were mere employees or were functioning as branch man"gers of various factories. their remuneration being dependent upon the work turned out.

It therefore came to the conclusion that the bidi workers were the employees of the appellants and not of the so-called contractors who were themselves nothing more than employees or branch managers of the appellants.

It finally held that reduction in the wages by two annas per thousand bidis was not justified and the workmen were entitled to the old rates. It therefore ordered the reduction in wages to be restored

Thereupon the appellants filed two writ petitions in the High Court, their contention being that the tribunal was wrong in holding that the contractors and the workmen employed by the contractors were Jhe workmen of the appellants. It seems that a sample agreement was produced before the High Court. which provided inter alia for the following terms : -

(\) That the proprietor should supply the tobacco and the bidi leaves;

12) th.at the intermediary should engage premises of

his own and obtain the requisite license to carry on the work of having the bidis rolled there;

(3) that at. no time sh.ould more than nine bidi rollers work m the premises of that intermediary;

14) that the intermedia.ry should meet all the incidental charges for rolling the bidis including the cost of thread and the remuneration paid t~ the b'd' rollers

1 I •

D.G. Dewan

... ~I ohideen Sahib

and Sona

Thelnduatrial Tribunal, Mad,...

Wanchoo, J.

D.C. Dewan M ohideen Sahib

and Sons

The Industrial Tribunal, Madras

lfanclwo, J.

(5) that for every unit of 1,000 bidis rolled and delivered by the intermediary to the proprietor, the latter should pay the stipulated amount, after deducting the cost of the tobacco and the bidi leaves supplied by the proprietor;

(6) that the intermediary i>hould not enter into. similar engagement with any other industrial concern;

(7) that the price of the raw materials and price to be paid for every unit of 1,000 bidis rolled and delivered were to be fixed at the discretion of the proprietor.

Besides these conditions, the contract also provided that it was liable to termination on breach of any of the conditions. and that the proprietors had no connection with and that they a;; sumed no responsibility for the bidi workers who had to look to the intermediary for what was payable to them for rolling the bidis.

The learned Single Judge on a review of the terms of the contract and the evidence on record held that neither the bidi roller nor the intermediary was an employee of the appellants. In consequence there could be no industrial dispute within the meaning of s. 2 (k) of the Industrial Disputes Act between the appellants and the bidi rollers.

The petitions were therefore allowed and the award of the tribunal was set aside.

Thereupon there were two appeals by the workmen. The appeal court on a con;; ideration of the terms of the contract and the findings of the tribunal came to the conclusion that the so-called contractors were really the agents of the appellants and that there. was no utter lack of control by the appellants on the bidi workers who actually rolled the bidi.

The appeal court also found that the intermediaries were impecunious and according to the evidence could hardly afford to have factories of their own. It also found that the evidence revealed that the appellants took the real hand in settling all matters relating to the workem. and the intermediary was a mere cipher and the real control over the workers was that of the appellants.

The appeal court therefore held that the appellants were the real employers of the workmen and the so-called intermediaries or so:called independent contractors who were in some cases ex-employees. were no more than agents of the appellantfi. In this view of the matter the appeal ; ourt held that the conclusion reached by the tribunal that the intermediaries were merely branch managers

~ I ,.

.. i

- ' :7 .S.C.R. \ '. SUPRElIE COURT REPORTS . 651 -- \ ' \.

'.,, '.apoin; ed by the :manageent and ·.the relation~i;-of em- 1964 . ployer and employees subsisted. between the appellants and D.(,. D, wan JJidi rollers was. correct. \ The appeals were -therefore allow- .Moltidun Sahib .ed, and the order of the tribunal was restored. The appellants andv~""' .have come _before ur; ori certificates -granted by the High The 1.a., trial .Court.

Tribunal, Madraa

The question whether 'relationship of master and servant subsists between an employer and employee .has .been. the subject of consideration by this Court in a number of cases.

Jn Dharangadhara Chemical, Works- Limited v. State of Saurashtra(') it WaJil held_ that the question _whether a person was a workman depended on whether he had been employed by the employer and the relationship of employer and employee or master and servant subsisted between them. It was well settled that a prima facie test of such relationship Wat> _the existence of the right in the employer not merely to direct what work was to be done but also to control the manner in which it was to be done, the nature or extent of such con-· trol varying in -different industries_ and being -by its very - nature incapable of being preCinely defined. , The correct approach therefore was to consider whether, having regard to the nature of the work there was due control and superviision by the employer. It was - further held that the question whether the relation between the parties was -one as between an employer and employee or master and servant was a pure question of fact. depending upon the circumstances of. each case. In that case, the dispute was whether certain agarias who were a class of professional labourers, were workmen or independent contractors. The facts found in that case - were that the agarias worked themselves with members of their families and were free to engage extra labour on their own account. No houn; of work were prescribed. No muster rolls were maintained; nor were working hours controlled by the master. There were no _rules as regards leave or holidays and the agarias were free to go out of the factory after making arrangements for the manufacture of salt. Even so. though certain features which -were usually to be found in a contract of service _were absent, the tribunal held that on the _whole the status of agarias was that of workmen and not that of independent contractors. particularly as supervision and control was exercised by' the master extending to all stages of manufacture from beginning to end. __ This Court' upheld the view of the tribunal on a review of the facts found in that case.

The next case to which reference has been -made -is Sh;; Chintaman Rao v. The State of Madhya_ Pradesh(').

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

(')_[1958] S.C.R 1340.

Wanchoo, J.

D.O. Liewan Mvhideen Sahib

The Industrial Tribunal, JJ<I adra&

Jfanchoo, J.

That was a case of bidi manufacture, and the question that arose for determination was whether certain persons known as sattedars and those who worked under the sattedars were workmen or not. It was found that the sattedars undertook to supply bidifl by manufacturing them in their own factories. or by entrusting the work to third parties at a price to be paid by the management' after delivery and approval. Reference was made to tlje principles laid down in D/zarangadhara Chemical Works Limited's case(') to determine whether the persons employed were workmen or not, and it was found that the sattedars were not under the control of the factory management and could manufacture the bidis wherever they pleased. It was therefore held that the coolies were neither employed by the management directly nor by the management through the sattedars.

A special feature of that case was that none of the workmen under the sattedars worked in factories. The bidis could be manufactured anywhere and there was no obligation on the sattedars to work in the factory of the management. The sattedars were even entitled to distribute tobacco to the workers for making bidis in the workers' respective homes. It wa6 in these circumstances that this Court held that the sattedars were independent contractors and the workers employed by them were not the workers of the management.

Then we come to the case of S/zri Bird/zichand Sharma

v. First Civil Judge Nagpur('). That was also a case of bidi manufacture. The facts found were that the workmen who rolled the bidis had to work at the factory and were not at liberty to work at their house6; their attendance was noted in the factory and they had to work within the factory hours. though they were not bound to work for the entire period and could come and go away when they liked; but if they . came after midday they were not supplied with tobacco and thus not allowed to work even though the factory closed at 7 p.m. Further they could be removed from service if absent for eight days.

Payment was made on piece rates accordin• to the amount of work done, and the bidis which did not

co~1e upto the proper standard could be rejected. On these facts it was held that the workers were workmen under the Factories Act and were not independent contractom. This Court pointed out that the nature and xtent of control varied in different industries and could not by its very nature be precisely defined.

When the oprtion was 'of simple nature and did not require superv1s10n all the time. control could be exercised ai the end of day by the method of rejecting bidis which did not come upto proper standard,

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

such supp-vision by the employer was sufficient to make the workers, employees of the employer and not independent contractors. The nature of the control required to make a person a servant of the master would depend upon the facts of each case.

The next case is Shankar Balaji Waje v. State of Maharashtrai'). That was also a bidi manufacturing case. On the facts of that case the majority held that decision in Shri Birdhichand Shanna's case(') was distinguishable and the appellant was not a worker within the meaning of the Factories Act. It may be noted however that that case also followed the line of decisions of this Court since the decision in the case Dharangadlwra Chemical Works Limited(") as to the criteria for coming to the conclusion whether a person was an employee or an'independent contractor.

The last case to which reference has been made is again a bidi manufacturing case, namely, Bhikusa Y amasa Kash-· tril'a (Pl Limited v. Union of India('). In that case the main question raised was about the constitutionality of s. 85 of the Factories Act and the notification issued by the State of Maharashtra thereunder. The Constitutionality of s. 85 and the notification made thereunder was upheld. The question: there involved was about the application of s. 79 of the Factories Act with reference to leave and the difficulty felt in Shankar Balaji Waje's case(') as to how leave could be calculated in the circumstances was explairied with reference to the decision in Shl'i Birdhic/wnd Shanna's case(').

It is in the light of these decisions that we have to decide whether the workmen who work under the so-called independent contractors in these cases are the workmen of the appellants. It has been found by the tribunal and this view has been confirmed by the appeal court that so-called independent contractors were mere agents or branch managers of the appellants.

We see no reason to disagree with this view taken by the tribunal arid confirmed by the appeal court on the facts of these cases. We are not unmindful in this connection of the view taken by the learned Single Judge when he held that on the agreements and the facts found the so-called intermediaries were independent contractors. We are however of opinion that the view taken by the appeal court in this connection is the right one. As the appeal court has rightly pointed out the

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

D.O. Dewan Moliirleen Saltib

and Sons ...

The lndustrial Tribunal, Madraw

JJ'ani::hoo, J,

JfJGJ

D.O. I>•uwa .11/rJlii•lrtn S1t/1il,

und ,<.,'on~

The J, idu; ir'ritil Tri1>un•il, Jln•l1·1M

654 BUPRE)IE COURT REPpRTS [1964]

so-calld independent contractors were indigent pemons who were in all respects under;. the cont'rol of the appellants. There is in our opinion little doubt that this system has been evolved to avoid regulations ur, der the Factories Act. Further there is also no doubt from whatever terms of agreement are available on the )ecord that the so-called independent contractors have really no independence at all.

As the appeal court hm; pointd !lpt they are impecunious persons who could harcjly afford to have factories of their own. Some of them are even ex-employees of the appellants. The contract is practically one sided in that the proprietor can at J1is'choice supply the raw niaterials or refuse lo do so. the so-ll<; d contract.or IHt\ing no right to insist upori the :rnpply of raw _!.l]aJerials to him.

The socalled independent contract6r--iif even bound not LO employ more than nine persons in his so-called factory.

The sale of raw materials to the so-called independent contractor and resale bv him of the manufactured biois is also a mere camouftage, the nature of which is apparent from the fuct that the so-called contractor never paid for the materials.

All that happens is that when the manufactured bidis are <lclivcred by him to the appellants. amounts due for the socalled sale of raw materials is deducted from the so-called price fixed for the bidis.

In effect all that happened is that the so-called independent contractor is supplied with tobacco and leaves and is paid certain amountE for the wages of the workers employed and for his own trouble. We can therefore

ee no difjiculty in holding that the so-called contractor is merely an employee or an agent of the appellants as held by the appeal court and as such employee or agent he employs workers to roll bidis on behalf of the appellants. The work is distributed between a number of r, o-called independent contractors who ate told not to employ more than nine persons at one place to avoid re&ulations µnder the Factories Act. We are not however concerned with that aspect of the matter in the present appeals.

But there can be no doubt' that the workers employed b..y the so-called con1ractors are really the workmen of the appellants who are em

0ployed through their agents or serv?nts whom they choo:; e io call independent contractors.

It is however urged that there is no control by even the agent over the bidi workers. Now the evidence shows that the bidi workers are permitted to take the leaves homes in order to cut them so that they might be in proper shape and size for next day's work; but the real work of filling the leaves with tobacco (i.e. rolling the bidir,) can only be doh.e in Jhe so-called factory of the , so-called independent contracior. No tobacco is ever given to the workers to be take11 home to be rolled into bidis as and when they liked. They have to

7 S.C.R.

SUPREl\IE COURT REPORTS 655

attend the so-called factory of the so-called independent contractor to do the real work of rolling bidis. As was pointed out hv this Court in Shri Birdhichand Shanna's case(') the work is of such a simple nature that GUpervision all the time is net required. In Birdhichand Sharma's case(') supervision was made through a system of rejecting the defective bidis, at the end of day. Jn the present cases we have not got the full terms of the agreement and it is therefore not possible to say that there was no kind of supervision or control over the workers and that the so-called independent contractors had to accept all kinds of bidis whether made upto standard or not. It is hardly likely that the so-called independent contractor will accept bidis which are not upto the standard; for that is usually the system which prevailr, ip this trade as will be apparent from the facts of the many bidi manufacturing cases to which we have referred. We are therefore not prepared to hold in the absence of any evidence one way or the other that there is no supervision whatsoever of the work done by the workers. Jn the circumstances we are of opinion that the relationship of master and servant between the appellant; and the workmen employed by the so-called indepen- _dent contractors is established.

As the appeal court has pointed out whenever there was a dispute in connection with the manufacture of bidis the workers looked to the appellants for redress.

In one of the cases the manager of one of the appellants ent a letter to the labour officer that the factory was agreeable to increase the wages of the workers from Rs. 1!14/- to Rs. 2/- per thousand bidis. In the other case also a similar letter was addressed showing that whenever there was increar; c or decrease in wages of the workers who work under the so-called independent contractors the real decision was taken by the appellants. This conduct on the part of the appellants is clearly inconsisterlt with their plea that the workers are not their employees and there is no privily between them and the said workers.

We are therefore of opinion that on the facts found in the cases the appeal court was right in holding that the conclusion reached by the tribunal that the intermediaries were merely branch managers appointed by the management and the relationship of employers and employees subsisted between the appellants and the bidi rollers is correct. In this view the appeals fail and are hereby dismissed with costs-one set of hearing costs.

Appeals dismissed.

(') [1961) 3 S.C.R. 161.

]J.C. Dncr:rn Mohidee.n :Safdb

an!! Sun.s

Tle I ndi1rBfrial Trilninrd, .JJia.draB

Tranrfwo, J.

D. C. DEWAN MOHIDEEN SAHIB AND SONS

THE INDUSTRIAL TRIBUNAL, MADRAS

P. B. GAJENDRAGADKAR

DAS GUPTA, JJ.

[1961] 3 S.C.R. 161

V. P. Raman

R. Gmwpathy Iyer

G. B. Pai

J. B. Dadachanji

C. Mathur

Ravinder Narain

T. S. Venkataraman

Wam:hoo

Government of Madras

lnd1tstrial Tribunal, Madras

Wanclwo

Factories Act

Wanchoo

Industrial Tribunal, Madras

lfanclwo

s. 2

Industrial Disputes Act

.Moltidun Sahib

D.O. Liewan Mvhideen Sahib

D/zarangadhara Chemical Works Limited

Birdhichand Shanna

Factories Act

Dharangadlwra Chemical Works Limited

s. 85

Factories Act

Maharashtra

s. 85

s. 79

Factories Act

Shankar Balaji Waje

Shl'i Birdhic

Shanna

D.O. Dewan Moliirleen Saltib

lndustrial Tribunal, Madraw

Factories Act

Factories Act

Birdhichand Sharma

[1961) 3 S.C.R. 161

.JJia.draB

Tranrfwo


.April 7 •

- -- --- ----~-----~-~

'; ''

SUPREl\IE COURT REPORTS

STATE OF GUJARAT ..

;; . \ , v . . ' . \ ~.

KANSARA MANILAL BHIKHALAL

[1964]

[M. HIDAYATULLAH AND N. RA.JAGOPALA AYYANGAR, JI.]

 Factories Act, 1948 (Act 63 of 1948, ss. 61, 63, 101 and 117- System of. work-Hours changed-Failure to notify-Applicabi. lity of s. '61(10)-Protective clause-Scope Responsibility of offence-Mens Rea, if necessary to establish.

On. insp.; ction three of the worlanen were found working in a factory before their shift commenced. It was stated that the Inspector of Factories was informed by a letter written . a day prior. to this inspection . about. the change of the timing though the letter did not reach the Inspector till the day after the inspection. This. change in the hours Of v.; ork -\vas not notified and displayed as required by s. 61(1) of the Factories Act. The Tespondent as the occupied/manager of the factory Was convicted. under s. 63 of the Act. On appeal, the Sessions .Judge acquitted the respondent holding that the second :Part

of s. 61(10) of. the Act applied to a case of second or subsequent change in the. system of. work in a factory and this being the first change there was no need to wait for a week or to obtain the previous sanction of the Inspector as required by the later part of s. 61(10), and further s. 117 of the Act protected the action. because it was bonafide. The State appealed to the High Court which agreed.with the Sessions Judge in his inter pretation of s. 61(10) but expressed no opinion on s. 117 of the ·

Act and it dis!Ilissed .the .appeal. On appeal by spec!al leave:

Held:· (i) The respondent, was not saved from the operac ti on of s. 63 which is peremptory,· by reason of anything. contained in S. 61,(10) and the sending of the letter to the Inspector of Factories v.1aS -therefore misconceived. The :words "change in the system of work in any factory which. will necessitate a change in the notice" in s. 61(10) refer not. to departure from the notice but to a -change in the system,, a change which would require the notice to be recast;. The notice shows "the

period during which adult workers may t e required to work" and these words are descriptive 0f the scheme of employment <>f labour in the factory but are not apt to contemplate the time of employment for each individual worker. That can only be. found by referring_ to the register whilch goes with the notice.-. Sub-section (1) makes no mention of the change in the' register but of the change in the notice and thereby indicates• that the change which is . contemplated is an over. all change affective to a whole group and not an individual worker •. The latter .. part of the sub-section also points in, the same direction because it lnip!ies that such changes should not be frequent and if the change is for the second time it should .. not be made until one week has elapsed since the last change.

(iti) The language of s. 117 of the Act is not limited to officers but is made wide to include "any person". The protection conferred can onlv be claimed by a person who can plead that he was required to do or omit to do something under the Act or that he intended to comply with any of its provisions. It cannot confer immunity in respect of actions which are not done under the Act but are done contrary to it.

7 S.C.R.

SUPRE)IE COURT REPOHTS 657

(iii) The occupier and. manaer,' are exempted from lia?ility in certain cases ment1oned in s. 101. her~ an occupier State of Guja.ral. <>r a manager is charged with an ?ffence he is entitled to make v. a complaint in his own turn against any person who \vas the J[ansara Manila! actual offender and on such proof the occupier or th_e rnanaer Bhil.:!1alal is atsolved from liability. This shows that compliance with the peremptory provisions of the Act is essential and unless the occupier or the manager brings the real offender to book he must bear the responsibility. It is not necessary that rnens rea must always be established. The responsibility exists without a guilty mind.

Ranjit Singh v. Emperor, Al.R. (1943) Oudh 308, Ranjit Singh v. Emperor, A.LR. (1943) Oudh 311, Public Prosecutor v.

Mangaldas Thakkar, A'.I.R. [1958] Andh. Pra. 79, In re P.

Lakshmaiah Naidu. I.L.R. [1958] Andh. Pra. 925, Public Prosecutor v. Vattem Venkatramayya, A.I.R. 1963. Andh. Pra. 106,

Provfncial Government C.l\ and Berar v. Seth Chapsi Dhan.ii Oswal Bhate and Anr. IL.R. [1940] Nag. 257 and Superinten dent and Remembrancer of Legal Affairs, Bengal v. H. E.

Watsrii?. A.T.R. 1934 Cal. 730, referred to.

CRIMINAL APPELLATE JURISDICTION: Criminal Appeal No. 5 of 1963.

Appeal by special leave from the judgment and order dated June 21, 1962 of the Gujarat High Court in Criminal Appeal No. 383 of 1961.

D. R. Prem and B. R. G. K. Achar, for the appellant.

M. V. Goswami, for the respondent.

April 7, 1962. The Judgment of the Court was delivered

HIDAYATULLAH, J.-On June 21, 1960 at 5-50 AM. the Inspector of Factories, Bhavnagar, visited Saurashtra Metal and Mechanical Works, Wadhwan City, which is a factory within the meaning of s. 2(m)(i) of the Factories Act, 1948.

He found seven workmen working on a machine and on examining the notice of period of work for adult workers and the register of workers he found that three of the workmen belonged to a group which was expected to begin work from 7 AM. He commenced proceedings under s .. 63 of the Factories Act. 1948 against the respondent Mr. Kansara Manila! Bhikhalal as the occupier I manager of the factory, after i>lming notice to him to show cause. He asked for en hanced penalty under s. 94 of the Factories Act because the said Mr. Manila! Bhikhalal was convicted on a previous occasion in three cases. As three workmen were concerned three separate complaints were filed in the Court of the Judicial Magistrate, First Class, Wadhwan City.

The defence of the respondent was that he was not the occupier and manager of the factory. It may be pointed out that one Mr. Dangi and the respondent are partners. They have another factory at Dharangadhra and the defence was that Mr. Bhikhalal was manager at the Dharangadhra factory

Hidayalullah, J.

Slate of <Jujarr1t

v. ](an.sara Jfanilal

Bltil:lwTnl

Hida!Jalullali, .f.

and Mr. Dangi was manager at Wadhwan. Another defence was that a machine had gone out of order the previous day and after it was repaired work was started a little earlier the next day, because production had suffered and goods were required.

The Inspector, it was stated, was informed by a letter (Ext. I]) written on the 2,0th about the change of timing though the letter, unfortunately, did not reach the ln:; pector till the 22nd. It was admitted that this change in the hours of work was not notified and displayed as required bys. 61(1). It was urged thats. 61(10) permitted a change to be made in the system of work in a factory and as this provision was fully complied with, there was no offence. The Judicial Magistrate did not accept these defences.

According to him, Mr. Dangi's letter (Ext. 15) showed that the respondent was the occupier and the manager of the factory at Wadhwan. On the second defence the Magistrate was of the opinion that the hours of work could not be changed without the permission of the Inspector of Factories under sub-s. (10) of s. 61. The contention on behalf of the respondent that this being the first change it was not neces.5ary to wait for one week before making another change, was not accepted because it was held that the factcry manager must always wait for one week before introducing a change. The respondent was, therefore, convicted under s. 63 of the Factories Act in respect of three offences and under s. 94, enhanced punishment wa:> imposed upon him by ordering him to pay a fine of Rs. JOO in respect of each offence.

On appeal the Sessions Judge of Surendranagar ordered the acquittal of the respondent. The learned Sessions Judge held that the second part of s. 61(10) applied to a case of second or subsequent change and this being the fimt change it did not fall within the second part.

According to the Sessions Judge. it fell in the first part of the sub-section and the change could not be said to have been effected in breach of that part since the Inspector of Factories was informed about the change. The learned Ses:<; ions Judge was also of the opinion that s. 117 of the Factories Act protected the action because it was bonafide. The conviction and sentence were accordingly set aside. The State of Gujarat appealed against the acquittal but was unsuccessful. A Division .Bench of the High Court which heard the appeal agreed w•!h the Sessions Judge in hi:; interpretation of s. 61 (10) and did not express any opinion on s. 117 of the Act. In this appeal filed by special leave of this Court these two points have again arisen for our consideration.

The scheme of the Factories Act bearing upon the pre sent matter may now be examined. It is convenient to do so

in the reverse orde!-.

Section 92 is a section providing generally for penalties and 6. 94 provides for enhanced penalty ; ifter previous conviction. These sections prescribe penalties for contravention of any of the provisions of tlie Act or of any rule made or of any order in writing given thereunder.

The breach here is stated to bt: of s. 63 of the Act which lays down that the hours of work must correspond with notice required to be displayed under s. 61 and the register directed to be 1!1aintained under s. 62. It provides:

"S. 63. Hours of work to correspond with notice under section 61 and register under section 62 .. -

No adult worker shall be required or allowed to work jn any f~1ctory' other\visc than in accordance with the notice of period;; of work for adults displayed in the faclorv and the entries made beforehand

~.gainst his name in the register of adult workers of the factory."

Section 61 deals with the notice of periods of work for adults. It is di, ided into 10 sub-sections of which sub-ss. m. (2) and ()()1 alone are relevant here. They are as follows:-

"6 l. Notice of periods. of work for adult5.-

(l) There shall be displayed and correctly maintained in every factory in accordance with the provisions of sub-section (2) of section 108, a notice of periods of work for adults showing clearly for

very day the periods during which adult workers may be required to work.

(21 The periods shown in the notice required by subsection <I) :; hall be fixed beforehand in accordance with the following provisions of this section, and shall be such that workers working for those periods would not be workin!! in contravention of any of the provisions of sctions Si, 52, 54, 55, 56 and 58 . • * *· • •

(JO) Any proposed change m the system of work in any factory which will necessitate a chane in the notice referred to in sub-section (!) shail be notified to the Inspector in duplicate before the change is made, and except with the previous sanction of the Inspector, no such change shall be made until one week has elapsed since the last change."

Stat< of Gujaral v. .

J[ansara Manila.l

BhikhaJ.al

Ilidayafullak, J.

State of Gujarat

Yo Kanaara .Manilal

Bhil:halal

Section 62 next provides that a register of adult workers. shall be maintained irr which will be shown (a) name of each adult workers in the factory; (b) the nature of his work; (c) the group, if any! in which he is included; (d) where his groupworks on shifts, the relay to which he is allotted and (e) such other particulars as may be prescribed. Section 51 to which reference is made in the second sub-section of s. 61, already quoted, prescribes a 48 hours week; s. 52 refers to weekly holidays; s. 54 generally fixes a maximum of 9 hours a day for work; s. 55 fixes the interval for rest and prescribes that working hours shall not exceed 5 hours at one stretch; s. 56 fixes generally that the period or work and rest should be spread over IOt hours and s. 58 prohibits the overlapping of shifts.

The Sessions Judge and the High Court concurred in holding that the provisions of sub-s. (10) were complied with and there was thus no offence under s. 63. They treated this as a change in the system of work in the factory necessitating: a change in the notice referred to in sulHi. (I) and held that as the change was notified to the Inspector before it was made there was nothing illegal in employing the three workers before their shift commenced. They also held that as this: was the first change there was no need to wait for a week or to obtain the previous sanction of the Inspector as required by the latter part of the tenth sub-section. With due res• pect to the High Court, we do not agree that this sort of case is contemplated by the tenth -sub-section. That sub-section speaks of "change in the system of work in any factory which will necessitate a change in the notice" and these words refer not to a departure from the notice but to a change in the system, a change which would require the notice to be recast. The notice shows "the periods during which adult workers may be required to work" and these word'S are descriptiveof the scheme of the employment of labour in the factory but are not apt to contemplate the time of employment for each individual worker. That can only be found by referring to the register which goes with the notice. Sub-s. (l) makes no mention of the change in the register _but of the change in the notice and thereby indicates that the change which is contemplated is an overall change affecting a whole group and not an individual worker. The latter part of the sub-section also points in the same direction because it implies that such changes should not be frequent and if the change is for the second time it should not be made until one week has elapsed since the last change. This cannot possibly refer to a casual change in the hours of work of an individual worker.

The learned counsel ro\Jght to justify the action by 1964 referring to s. 59 which provides that extra wages for overstate of Guiarot time shall be paid. No such claim was made earlier in this v. "fi h n] f h · f Kamara Manilal case and justJ cation was soug t o y rom t e prov1s1ons o Bhiklialal sub-s. (10) of s. 61 and s. 117 of the Act. Section 59 cannot be considered in isolation: It has to be read with s. 64, where Hidaya1, t11a1., J. the State Government has been given the power to make 'exempting rules'. Under those rules a departure from the provisions of ss. 51, 52, 55 and 56 can be made but only in accordance with the rules so framed; as for example, overtime work may be taken from workers engaged on urgent repairs in spite of the provisions of ss. 51, 54, 55 and 56, but must be in accordance with rule 91 and the urgency which is referred to in this section and the rule is 'an urgency relating to the factory and not an urgency felt by the constituents of the factory'.

A departure from the hours of work as laid down in .s. 61(2) can only be made in those cases in which the exempting provisions of the rules cover the case and not otherwise.

It would, therefore, appear that the offence which was committed in the case was the employment of workers contrary to the notice displayed under s. 61 (I) without any justification by reason of any exempting provisicn. The respondent was not saved from the operation of s. 63, which is peremptory, by reason of anything contained in sub<>. (10) and the sending of the letter to the Inspector of Factories was therefore mis-conceived.

It was contended before us that the respondent was not the occupier I manager of the factory and, in any event, s. 117 of the Act protected him because he was not present there and his action was bonafide. As to the first part of this argument it is sufficient to say that the Magistrate found that he was the occupier and manager. The letter of Mr. Dangi (Ext. 15) quite clearly establishes this. The argument under s. 117 of the Act requires a more detailed consideration.

That section reads as follows:-

" 17. Protection to persons acting µnder this Act.-

No suit, prosecution or other legal proceeding shall lie against any person for anything which is in good faith done or intended to be done under this Act."

lt is argued by Mr. M. V. Goswami on the authority of cases abo_ut to be mntioed that this section gives protection agamst prosecution m respect of anything which is done in good faith under the Act. He referred us to two decisions of

Jf)1;.J

State of fluja.rut

K11n-s(trr1 J[unilal

Bl!ild1nlal

Hiduya(ullal1, .].

Thomas, C. J. in Ranjit Singh v. Emperor(') and Ranjit Singh

v. Emperor,(') in which the learned Chief Justice observes that the language of s. 117 is not limited to the inspecting staff but is wide enough to include occupiers, managers, foremen, workers etc. Mr. Goswami also refers to two decisions of the Andhra Pradesh High Court in Public Prosecutor v.

Mangaldas Thakker(i and In re. P. Lakshmaialz Naidu(') in which the same view has been expressed. Mr. D. R. Prem on behalf of the State of Gujarat relies on The Public Prosecutor v. V11tte111 Venkatramayya(") and Provincial Gmemment, C.P. and Berar v. Seth Chapsi Dhanji Oswal Bhate and A11r('). Reference was also made to Superintendent and Remembrancer of Legal Affairs, Bengal v. H. E. Watson(').

It is not necessary to refer to the lines of reasoning adopted in these cases. The language of this protecting clause is not limited to officers but is made wide to include "any person". It thus gives protection hot only to an officer doing or intending to do something in pursuance or execution of this Act but also to "any person". But the critical words arc "any thing

* * • done or intended to be done" 1111der the Act. The protection conferred can only be claimed by a person who can plead that he was required to do or omit to do something under the Act or that he intended to comply with any of its provisions. It cannot confer immunity in respect of action~ which are not done under the Act but are done contrary to it. Even assuming that an act includes an omission as stated in the General Clauses Act, the omission also must be one which is enjoined by the Act.

It is not sufficient to say that the act was honest. That would bring it only within the words "good faith". It is necessary further to establish that what is complained of is something which the Act requires should be done or should be omitted to be done.

There must be a compliance or an intended compliance with a provision of the Act, before the protection can be claimed. The section cannot cover a case of a breach or an intended breach of the Act however honest the conduct otherwise.

In this connection it is necesary to point out. as was done in the Nagpur case above referred to, that the occupier and manager are exempted from liability in certain cases mentioned in s. 101. Where an occupier or a manager is charged

('I A.LR. (1943) Oudh 308. ('I A.I.R. (1943) Oudh 311. (l A.LR. (1958) Andh. Pra. 79. ( 'J I.L.R. (1958) Andh. Pra. 925. ('I A.LR. (1963) Andh. Pra. 106). (') I.L.R. (1940) Nag. 257=A.I.R. (1938) Nag. 408. (') A.I.R. (1934) Cal. 730.

7 S.C.R.

SUPRE1\1E COURT REPORTS 663

with an offence he is entitled to make a complaint in his own

WG4 turn against any person who was the actual offender and on S1·11< 1 !:11jan1t proof of the commi~ion of the offence by such person the . ,.. . . l . b l . d f )" b"l" Tl .

Knn.~"r" 1J11?11!11l occupier or t 1e manager 1s a so ve rom ia 1 1ty. 11s m,;1.-1,,,,,, 1 shows that compliance with the peremptory provisions of the Act is essential and unless the occupier or the manager brings Il>"•10?1"'1111"i.. J. the real offender to book he must bear the responsibility.

Such a provision largely excludes the operation of s. 117 in respect of persons guilty of a breach of the provisions of the Act. It is not necessary that mens rea must always be established as has been said in some of the cases above referred to.

The responsibility exists without a guilty mind.

An adequate safeguard, however, exists in s. IOI analysed above and the occupier and manager can save themselves if they prove that they are not the real offenders but who, in fact. is.

No such defence was offered here.

For these reasonr, we are of the opinion that the res-" pondent is not saved by s. 117. We, accordingly, set aside his acquiital and convict him under s. 63 read with s. 94 of the Factories Act. He is sentenced to pay a fine of Rs. 50 !- in respect of each of the offences, or in default to undergo 15 days' simple imprisonment.

Appeal allowed.

STATE OF GUJARAT

KANSARA MANILAL BHIKHALAL

M. HIDAYATULLAH

N. RA.JAGOPALA AYYANGAR

Factories Act, 1948

ss. 61, 63, 101 and 117

s. 61(1)

Factories Act

s. 63

s. 61(10)

s. 61(10)

s. 117

s. 61(10)

s. 117

s. 63

S. 61

s. 61(10)

s. 117

s. 101

D. R. Prem

B. R. G. K. Achar

M. V. Goswami

HIDAYATULLAH

Bhavnagar

s. 2(m)(i)

Factories Act, 1948

Factories Act

Kansara Manila! Bhikhalal

s. 94

Factories Act

Manila! Bhikhalal

Dangi

Dharangadhra

Bhikhalal

Hidayalullah

an.sara Jfanilal

Wadhwan

s. 61

s. 63

Factories Act

s. 94

Sessions Judge of Surendranagar

s. 61(10)

s. 117

Factories Act

State of Gujarat

s. 61

s. 117

Factories Act

Section 92

s. 63

s. 61

s. 62

S. 63

section 61

section 62

Section 61

section 108

Ilidayafullak

State of Gujarat

Section 62

Section 51

s. 61

s. 52

s. 54

s. 55

s. 56

s. 58

s. 63

s. 59

Kamara Manilal

s. 61

s. 117

Section 59

s. 64

ss. 51, 52, 55 and 56

ss. 51, 54, 55 and 56

s. 61(2)

s. 61

s. 63

s. 117

s. 117

M. V. Goswami

Thomas

s. 117

Goswami

Andhra Pradesh High Court

P. Lakshmaialz Naidu

D. R. Prem

State of Gujarat

Nagpur

s. 101

s. 117

s. 117

s. 63

s. 94

Factories Act


April 8

SUPREME COURT REPORTS [1964]

STATE OF ANDHRA PRADESH

ABDUL BAKHI AND BROS. [K. SuBBA RAO, J. C. SHAH ANDS. M. SIKRI, JJ.] Sale.• Tax-Total Turnover included price for buying tanning bark-That price is taxable--Dealer-Meaning of-- Hyderabad General Sales Tax Act, 1950, s. 2(c), 2(m)-Sales Tax Rules, rr. 5-(1), 5(2).

The respondents are registered dealers carrying on the business of tanning hides and skins and selling the tanned skins. The authorities under the Hyderabad General Sales Tax Act, 1950 assessed the respondent for the total turnover which included the price paid by the respondent for purchasing, tanning bark used in the tanning process. The respondent contended that the price paid for the purchase of trnning bark should be excluded from -the taxable turnover because the tanning bark was bought by the respondent for consumption and not for sale and hence the respondent was not "dealer" qua the •tanning bark.

His contention was not accepted by the Tax authorities. In a petition to the High Court under s. 22(1) of the Hyderabad General Sales Tax Act the contention of the respondent was accepted and the assessment was modified. In appeal filed with special leave, Held: The High Court was in error in holding that a purchaser is liable to pay tax under r. 5(2) of the Saks Tax Rules only when he is carrying on a business of buying and . selling a commodity specified in sub-r. (2) and not when he buys it for consumption in a process for manufacturing a commodity to be sold by him.

(ii) To regard an activity as a business there must be a course of dealing either actually continued or con lemplated to be continued with a profit motive and not for sport or pieasure.

But to be a dealer a person need not follow the activity of buying, selling and supplying the same commodity. The Act requires merely that buying of the commodity mentioned in r. 5(2) must be in the course of business; that is it must be for sale or use with a view to take profit out of the integrated activity of buying. and disposal. The commodity may itself be converted into another saleable commodity or it may be used as an ingredient or in p. id of a manufacturing process leading to the production of such saleable commodity.

(iii) In the present case the tanning bark was not bought by the respondent for any purpose unconnected with the business. Consumption of the tanning bark in the manufacturing: process did not therefore exclude the respondents from the definition of dealer qua the tanning hark.

Sadak Thamby and Companu v. State of Madras, 14 S.T.C. 153, approved.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 473 of 1963.

Appeal by special leave from the judgment and order March 22, 1960, of the Andhra Pradesh High Court in Tax Revision Case No. 88 of 1960.

A. Ranganadham Chetty, B. R. G. K. Achar and R. N.

Sachthey, for the appellant.

The respondent did not appear.

7 S.C.R.

SUPREME COURT HEPOH'l'S 6()5

April 8. 1964. The Judgment of the Court was delivered by

SHAH, J.-The respondents who are registered as dealers under the Hyderabad General Sales Tax Act. 1950 carry on the business of tannin2 hides and skins and of selling the tanneJ skins in the town of Hyderabad. For the purposes bf their business the respondents purchase undressed hides am! skins and also tanning bark and other materials required in their tannery. For theassessment year 1954-55 the Sales-tax Officer, Circle IV, Hyderabad. found that the total turnover of the respondents was Rs. 5,70,417-12-4 (0.S.) in respect of the hides, skins, wool and tanning bark. The respondents disputed their liability to pay tax on Rs. 6 J ,431-14-9 (O.S.1 included .in the turnover contending that this amount represented the price paid for buying tanning bark required in their tannery. They submitted that tanning bark was bought for consumption in the tannery and not for sale, and they were accordingly not dealers in tanning bark and therefore the price paid for buying tanning bark was not liable to duty under the Hyderabad General Sales Tax Act. The Sales-tax Officer rejected the contention of the respondents. and his order was confirmed in appeal by the Deputy Commissioner.

C. T .. Hyderabad Division and also by the Sales Tax Appellate Tribunal. Hyderabad. But the High Court of Andhra Pradesh in a petition under s. 22(1) read with rule 40 framed under the Andhra Pradesh General Sales Tax Act VII ol'

1957 modified the order passed by the taxing authorities and excluded from the computation of the taxable turnover the price paid by the respondents for the tanning b::.rk used in the tannery. With special leave, the State of Andhra Pradesh bas appealed to this Court.

Section 2(e) of the Hyderabad General Sales Tax Act defines "dealer" as meaning any person. local authority. company, firm, Hindu undivided family or any association or associatibns of persons engaged in the l; usiness of buying. selling or supplying goods in the Hyderabad State whether for a commission, remuneration or otherwise and includes a State Government which carries on such business and anv society. club or association which buys or sells or supplies goods to its members. Section 2(m) defines "turnover" as meaning an aggregate amount for which goods are either

bouht by or sold by a dealer, whether for a cash or for deferred payment or other valuable consideration. By. s. 4 a tax at the rate of three pies in the rupee in T. G. currency on so much of the turnover for the year as is attributable to transactions in goods other than exempted goods is imposed.

Rule 5(1) provides that save as provided in sub-rule i2l the turno, er of a dealer for the purpose of the rules shall be the amount for which goods are sold by the dele:ir. Rule 5(21 provides that in the case of certain commodities the turnover

l!JG4

8fnlc of .And/ira l't; tds!.

' AUdal 1>111:/ii a116-

]Jrolh£rs

:$.ha! .. , J.

Bkdeof Andkra Pradesli

v . .4/ld.Z Bakhi awl.

Brofhtrs

Shah, J.

SUPREME COURT REPORTS [1964]

of a dealer for the purpose of the rules shall be the amount for which the goods are bought by the dealer. Those commodities are : -

(a) Groundnut (shelled or unshelled);

(b) Bidi leaves;

(c) Tarwar and other tanning barks;

(d) Tit; karad and castor seed;

(e) Cotton including kappas; (f) Linseed, turmeric, dhania and other agricultural produce including all kinds of dhals and paddy (husked or unhusked) not otherwise exempted under the said Act, but excluding cotton seed, sugarcane, tea and coffee seeds;

(g) Hides and skins;

(h) Wool, bones and horns.

The High Court of Andhra Pradesh rejected the claim of the taxing authories to tax the tanning bark bought by the respondents on the ground that a purchaser is liable to pay tax under Rule 5(2) only when he is carrying on business of buying and selling a commodity specified in the sub-rule

(2) and not when he buys it for consumption in a process for manufacturing an article to be sold by him. Therefore, in the view of the High Court if a dealer buys any commodity included in Rule 5(2) for consumption in his business but not for sale, he is not to be regarded as engaged in the business of buying, selling or supplying that commodity and the price paid for buying the commodity is not liable to tax.

We are unable to agree with this view of the High Court.

A person to be a dealer must be engaged in the business of buying or selling or supplying goods. The expression "business" though extensively used a word of indefinite import, in taxing statutes it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated tb be continued with a profit motive, and not for sport or pleasure. But to be a dealer a person need not follow the activity of buying selling and supplying the same commodity. Mere buying for personal consumption i.e. without a profit motive will not make a person, dealer within the meaning of the Act, but a person who consumes a commodity bought by him in the wurse of his trade, br use in manufacturing another commodity for sale, would be regarded as a dealer. The Legislature has not made sale of the very article bought by a person a condition for treating him as a dealer: the definition merely requires that the buying of the commodity mentioned in Rule 5(2) must he in the course of business, i.e. must be for sale

7 S.C.R.

SUPRE'.\IE COURT REPORTS 667

or use with a view to make profit out of the integrated activity of buying and disposal. The commodity may itself be converted into another saleable commodity, or it may be used as an ingredient or in aid of a manufacturing process leading to the production of such saleable commodity.

It cannot be said in the present case that the tanning bark was bought by the respondent for any purpose unconnected with the business carried on by them, viz .. manufacture and sale of dressed hides and skins. Consumption in the business and not sale of the commodity bought therefore does not exclude the respondents from the definition of dealer

a11a the tanning bark. This is the view which has, in our judgment, been rightly taken by the Madras Hight Court in the int, erpretation of a similar statute in operation in the State of Madras in L.M.S. Sadak Tliamby and Compa1n v.

The State of Madras(').

The appeal is therefore allowed and the order passed by the High Court is set aside and order passed by the Sales-tax Appellate Tribunal restored. No order as to costs.

Appeal dismissed.

Sfolr t•f

A1111/,,1: p,.,~{!(~11 '"· Abdul /J11klii onil

J/rolj,, ;8

STATE OF ANDHRA PRADESH

ABDUL BAKHI AND BROS

K. SuBBA RAO, J.

C. SHAH ANDS. M. SIKRI, JJ.

s. 2(c), 2(m)

Sales Tax Rules

s. 22(1)

A. Ranganadham Chetty

B. R. G. K. Achar

R. N.

Sachthey

S 6()

SHAH

Hyderabad

Sales Tax Appellate Tribunal. Hyderabad

High Court of Andhra Pradesh

s. 22(1)

State of Andhra Pradesh

Section 2(e)

Section 2(m)

s. 4

Bkdeof Andkra Pradesli

Shah

Brofhtrs

Shah, J.

of a dealer for the purpose of the rules shall be the amount for which the goods are bought by the dealer.

Madras Hight Court


.April 9

SUPREME COURT REPORTS (1964]

DR. SHAMLAL NARULA v.

COMMISSIONER OF INCOME-TAX, PUNJAB

(K. SUBBA RAO, J.C. SHAH ANDS. M. SIKRI, JJ.J

Income Tax-Land acquired-Award made. by Collector- Interest on compensation awarded-If interest amounted to a part of compensation-Indian Income-tax Act, 1922 (11 o.f 1922), ss. 3, 4-Land Acquisition Act, 1894, s. 34.

The State acquired the land of the appellant. Tne Collector made an award under the Land Acquisition Act as a result of which the appellant received Rs. 2,81,822/c, which included a sum of Rs. 48,660/- as interest upto the date of the award. The Income-tax Officer included Rs. 48,660/- (the said interest) in the total income of the appellant on the ground that the said amount was not a capital receipt. The matter went upto the Income-tax Appellate Tribunal. The Tribunal excluded the said interest from the total income of the assessee (appellant) on the ground that it was a capital receipt. On a reference the High Court held that the said interest was not a capital but a revenue receipt and as such liable to tax under the Indian Income-tax Act. The High Court granted a certificate to the appellant to file an appeal to the Supreme Court. Hence the appeal.

Held: (i) The scheme of the Land Acquis'tion Act and the express provisions thereof establish that the statutory interest payable under s. 34 is not compensation paid to the owner for depriving him of his right to possession of the land acquir- ed, but that given to him for the deprivation of the use of the money representing the compensation for the land acquired.

In other words the statutory interest paid under s. 34 of the Act is interest paid for the delayed payment of the compensation amount and, therefore, is a revenue receipt liable to tax under the Income-tax Act.

Behari Lal Bhargava v. Commissioner of Income-tax .. C.P . .and U.P., (1941), 9 I, T.R. and P. V. Kurien v. Commissioner of

Income-tax, Kerala, (1962), 46 I.T.R. 288, overruled.

Westminister Bank Vtd. v. Riches, (1947), 28 T.C. 159. Commissioner of Income-tax, Madras

v. CT. BM. N. Narayanan Chettiar, (1943), 11 I.T.R. 470 and Commissioner of Income-tax

Bihar and Orissa v. Maharajadhiraj Sir !(ameshwar Singh~ (1953), 23 I.TR. 212, approved. ·

Inglewood Pulp and Paper Co. Ltd. v. New Brunswaick Electric Power Commission, A.LR. 1928 P.C. 287 and Revenue Divisiqnal Officer, Trichinopoly v. Venkatarama Ayyar, A.LR. 1936 Mad. 199, distinguished.

Shaw Wallace's case, A.LR. 1932 P.C. 138, Schulze v.

Bensted, (1915), 7 T.C. 30, and Commissioner of Inland Revenue

v. Barnato, (1934--36), 20 T.C. 455, referred to.

(ii) The interest under s. 34 of the Land Acquisition Act shall be paid on the amount awarded from the time the Collector take possession until the amount is paid or deposited. It

'7 S.C.R.

SUPREl\IE COURT REPORTS 669

makes no difference in the legal position between a case where 1964 possession has been taken before and that where possession Dr Shamlal Nanda has been taken after the award, for in either case the title vests T. in the Government only after possession has been taken.

Oommi88ioner of In no sense of the term can it (interest) be described as lncome-Taz, Punjah <iamages or compensation for the owner's right to retain possession, for as he has no right to retain possession after possession was taken under s. 16 or s. 17 of the Act.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 503 of 1963. Appeal from the judgment and order dated January JI, 1962, of the Punjab High Court in I.T.R. No. 28 of 1960.

B. N. Kripal and A. N. Kripal, for the appellant.

Gopal Singh and R. N. Sachthey, for the respondent.

April 9, 1964. The judgment of the Court was delivered •

SuBBA RAO, J .-This appeal by certificate granted by the Su!Jba Rao, J.

High Court of Punjab raises the question whether interest paid under s. 34 of the Land Acquisition Act, 1894, hereinafter called the Act, is of the nature of a capital receipt or of a revenue receipt.

The relevant facts are not in dispute and they may be briefly stated. The appellant, Dr. Shamlal Narula, is the Manager of a Hindu uncH.vided family, which owned, inter alia, 40 bighas and 11 biswas of land in the town of PatiaJa.

The Patiala State Government initiated land acquisition proceedings for acquiring the said land under Regulation then prevailing in the Patiala State. It is common case that the .State Regulations are in pari materia with the provisions of the Act. The State of Patiala first merged into the Union of Pepsu and later the Union of Pepsu merged into the State of Punjab. It is also common case that there was a Land Acquisition Act in the Union of Pepsu containing provisions similar to those obtaining in the Act. On October 6, 1953, the Act was extended to the Union of Pepsu. On September 30,

1955, the Collector of Patiala made an award under the Act as a result of which the appellant received on December 1, 1955, a sum of Rs. 2,81,822 I-, which included a sum of 48,660 /- as interest up to the date of the award. For the year 1956-57, the Income-tax Officer included the said interest in the incme of the Hindu undivided family of which the appellant is the manager, and assessed the same to income-tax, after overruling the appellant's contention that the said interest was a capital receipt and, therefore, not liable to tax.

On June 14, 1957, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. The Appellant

preferrd an appeal to the Income-tax Appellate Tribunal.

The said Tribunal by its order dated July 9, 1957, held that ·

1964 the said amount representing the interest was a capital re-

Dr. Shamlal Narula ceipt and. on that finding the said amout was excluded from v. the total mcome of the assessee. At the mstance of the Com- Commissioner of missioner of Income-tax the said Tribunal referred the follow- Income-1'""· Pnnjab ing question tcr the High Court of Punjab under s. 66-(1) of

Subba Rao, J. the Income-tax Act, 1922:

"Whether on a tre interpretation of section 34 of the Land Acquisition Act and the Award given by the Collector of Pepsu on the 30th September, 1955, the sum of Rs. 48,660/-, was captital receipt not liable to tax under the Indian lncometax Act?" The said reference was heard by a Division Bench of the High Court and it held that the said amount was not a capital but a revenue receipt and as such liable to tax under the Indian Income-tax Act. Hence the present appeal.

Learned counsel for the appellant raised before us two contentions, namely, (i) the sum of Rs. 48.660/- received by the appellant under the award was compensation for deprivinr; him of his right to possession of his property and was therefore, a capital receipt not liable to tax; and (ii) whatever may b~ the character of the amount awarded under s. 34 of the .Act by way of interest in a case where possession of the land has been taken by the State after the award, in a case where possession of the land acquired has been taken before the award, it would be a capital receipt, for it is said that in the latter the interest necessarily t<:kes the character of compensation for depriving the owner of the land his right to possession.

bn behalf of the Revenue the order of the High Court is sought to be sustained for the reasons stated therein.

The question raised turns upon the true meaning of the provisions of s. 34 of the Act. It reads:

"When the amount of such compensation is not paid or deposited on or before taking possession of the land. the Collector shall pay the amount awarded with interest thereon at the rate of six per centum per annum from the time ,Jf s.1 taking possession until it should have been so paid or deposited".

The section itself makes a distinction between the amtmnt awarded as compensation and the interest payable on the amount so awarded. The interest shall be paid on the amount awarded from the time the Collector takes possession until the amount is paid or deposited. To appreciate the scope of the section it is necessary to notice brietly the scope of an award and the manner in which possession is taken under the Act. After the statutory notifications are issued and the

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7 S.C.R~ ""'· .

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requisite notice is given to the persos interested in the land 1964 :so . acquired, the Collector, afte.r holding h_e . necessary en- /Jr. Shaffllal Narula . qmry, makes an award, inter aba. determmmg the amount v. of compensation payable for the land so acquired. Section 15 Oommi .. irmer 0/. f th A h d · h f IncomeTax Punjab o e ct sayst at m etermmmg t e amount o compensa- _' tion the Collector shall be guided by the provisions contained Subba Rao, J . in ss. 23 and. 24. Section 23 provides for the matters to be considered dn determining compensation; s. 24 describes the matters to be neglected in determining the compensation. A perusal of the provisions of s. • 23 shows that interest is not an item included in the compensation for any of the matters mentioned therein; nor is it mentioned as a consideration for the acquisition of the land. Under cl .. (2) of s. 23, the Legislature in express terms states that in addition to the market value of the land the court shall in every case award a sum of 15 per cent. of such market value in . consideration of the compulsory. nature of the acquisition. If interest on the amount of compensation determined under s. 23 is consider- ed to be a part of the compensation or given consideration of the compulsory nature of the acquisition, the Legislature would have. provided for it in s. 23 itself. But instead, payment of interest is provided for separately under s. :14 in Part V of the Act under the heading "Payment". It is so done, because interest pertains to the domain of payment after the compensation has been ascertained. It is a conside- -ration paid either for the use of the money or forbearance from demanding it after it has fallen due. Therefore, the Act itself makes a clear distinction between the compensation payable for the land acquired and the interest payable on. the .compensation awarded.

Another approach to the problem leads to the same :result. Under s. 16 of the Act when the Collector has made an award under s. 11 he may take possession of the land which shall thereupon vest absolutely iii the Government :free from all encumbrances. Under s. 17 thereof:

"In cases of urgency, whenever the appropriate Government so directs, the Collector, though no such award has been made, may, on the expiration of fifteen days from the publication· of the notice mentioned in section 9, sub-section • (1), take possession of any waste land or arable land needed for public purposes or for a Company.

Such land shall thereupon vest absolutely in the Government, free from all encumbrances".

Under both the sections the land acquired vests absolutely in 1he Government after the Collector has taken possession-in •One case after the making of the award and in the other, even

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[1931}

1961 before -the making of the award. _In either case. some time: llr. 8,,,,-;;;;; J Narula may lapse between the taking of possession of. the -acquired

- ..-. _ land by the Collector and the payment or deposit of the com- Oommissianer oJ. pensation to -the person interested in the land -acquired. As. 1•comeTax, Pun; ab the land acquired vests absolutely in the Government only

S"1iba Rao, J. after the Collector has taken possession of it. no interest

- therein will be outstanding in the claimant after the taking.

-of such possession: he is divested of his title to the land and his right to possession thereof. and both of them vest thereafter in -the Government. Thereafter he will be entitled only to be paid compensation that has been or will be awarded to him. He will be entitled to compensation, though the ascertainment thereof may be postponed, from the date his. title to the land and the right to possession thereof have been divested and vested in the Government. It is as it were that from that date the Government .withheld the compensation amount which the . claimant would be entitledto under the provisions of the Act.

Therefore. a statutory liability has. been irilposed upon the Collector_ to pay interest on the amount awarded from the time of the-taking possession until the ainoun( is paid or deposited. This amount is not •. therefore, compensation for the land acquired or for depriving theclaimant of his right to possession. -but is that paid to the claimant for the use of his money by the State. In this view there cannot be any difference in the legal position betweerr a case where possession has been taken before and that wherepossession has been taken after the award. for in either case -the title vests in the Government only after possession has been taken.

The Legislature expressly used the word "interest" with its well konwn connotation under s. 34 of the Act. It is. therefore. reasonable to give that expression the naturar meaning it bears. There is an illuminating exposition of the: expression '.'interest .. by the House of Lords in Westminster-

Bank. Ltd. v. -Riches('). The question there was whether where in an action for recovery of any debt or damages thecourt exercises: its discretionary power under a statute and orders that there shall be included in the suin for which the judgment is given interest on -the debt -or damages. the sum of interest so included is taxable under the Income-tax -Acts.

If the said amount was "interest of money" within Schedule D and the General Rule 21 of the All Schedules Rules of the Income Tax. Act. 1918,-income-tax was payable thereon. lnthat context it was contended that .money awarded as <lama~ ges forthe detention of money was not interest and had not the quality of interest: Lord Wright observed:

_"The general idea is that he is entitled to compensation for _the deprivation. Fromthat point of view

(') (1947) 28 T~C. 159,-189. --

it would seem immaterial whether the money was 1964 due to him under a contract express or implied, •/Jr. sam/al N....i.. or a statute, or whether the money was due for v. any other reason in law. In either case the money Commiuioner 0f d h. d 'd . h Income-Tax, Punjab was ue to 1m an was not pa1 or, m ot er _ words, was withheld from him by the debtor after Subba R<UJ, J. the time when payment should have been made, in breach of his legal rights, and interest was a compensation, whether the compensation was liquidated under an agreement or statute, as for instance under section 57 of the Bills of Exchange Act, 1882, or was unliquidated and claimable under the Act as in the present case. The essential quality of the claim for compensation is the same, and the compensation is properly described as interest".

This passage indicates that interest, whether it is statutory or

.,; ontractual, represents the profit the creditor might have made if he had the use of the money or the loss he suffered, because he had not that use. It is something in addition to the capital amount, though it arises out of it. Under s. 34 of the Act when the Legislature designedly used the wbrd "interest"

in contradistinction to the amount awarded, we do not see any reason why the expression should not be given the naturnl meaning it bears.

The scheme of the Act and the express provisions thereof establish that the statutory interest payable under s. 34 is nbt compensation paid to the owner for depriving him of his right to possession of the land acquired, but that given to him for the deprivation of the use of the money representing the compensation for the land acquired.

We shall now proceed to consider the case law cited at the Bar. Where a Tribunal directed the Improvement Trust, under the provisions of s. 28 of the Land Acquisition Act, to pay interest to the assessee from the date of taking possession of the prbperty to the date of payment, a Division Bench of the Allahabad High Court held, in Behari Lal Bhargava '" Commissioner of Income-tax, C. P. and U. P. ('), that the interest so awarded was in the nature of compensation for the loss of the assessee's right to retain possession of the property acquired and, therefore, was no income liable to tax.

The reason for the said conclusion is stated thus:

"It ls not the "fruit of a tree"-to borrow the simile used in Shaw Wal/ace's case (')-but was compensation or damages for loss of the right to re-

('l (1941) 9 l.T.R. 9, 24.

1') A.LR. 1932 P.C. 138.

L P(D)i8C-"'J

Dr. Shamlal Naro/a

. v.

tain possession; and it seems to us that Section 28 was designed as a convenient method of measuring such damages in terms of interest" .

Commiuioner of 11!!'-0me.Tax, Punjab . , As we have pointed out earlier, as soon as the Collector has B.V, ba Rao, J, taken possession of the land either before or after the award the title absolutely vests in the Government and thereafter owner of the land so acquired ceases to have any title or right of possession to the land acquired. Under the award he gets compensation for both the rights. Therefore, the interest awarded under s. 28 of the Act, just like under s. 34 thereof. cannot be a compensation or damages for the less of the right to retain possession but only compensation payable by the State for keeping back the amount payable to the owner.

Adverting to the said decision a Division Bench of the Madras High Court in Commissioner of Income-tax, Madras v. CT.

RM. N. Narayanan Chettiar(') observed:

" ......... with great respect we find ourselves unable to follow the reasoning. Certainly we are not prepared to accept the judgment as a guide to the decision in the present case".

So was the interest granted to an assessee under s. I SA of

the Income-tax Act on the advance payment of tax by him under the provision of that section held to be incame taxable in his hand: see Commissioner of Income-tax, Bilwr and Orissa v. Mahara}µdhiaj Sir Kameshwar Singh('). There. when the decision of the Allahabad High Court in Behari Lal Bhargava's case(') was relied upon, the learned Judges, refusing to follow it, observed thus i

"It is not a matter of discussion for the Central Government but the duty to pay interest is imposed by statute. Apart from this I think (with grat respect) that the Allahabad decision is of doubtful authority. The decision is not consistent with the principle laid down in Schulze v. Bensted(') and Commissioners of Inland Revenue v. Barnato(').

The Madras High Court expressly declined to follow the Allahabad case in Commissioner of Income-tax v. Nm•ayanan Chettiar(')."

The Kerala High Court in P. V. Kurien v. Commissioner of !11co111e-tax, Kera/a(") held that interest paid on the enhancl'd amount of compensation directed to be paid by an appellate

(') (1943) 11 I.T.R. 470, 477.

(') (1953) 23 I.T.R. 212, 225.

(') 9 I.T.R. 9. i') (1915) 7 T.C. 30.

(') (1934-36) 20 T.C. 455.

(') (1962) 46 I.T.R. 288.

court in an appeal against an award of compensation for 196' compulsory acquisition of land under the Land Acquisi- Dr. SlwmJal Narul~

tion Act represented capital and was not income liable to he _v.. ,, d h I d.

I A I d h Oommts"""'' o, taxed un er t e n ian ncome-tax ct. t was argue t ere, Imome-Tax Puniab as is argued before us, that the interest awarded was a capital ' sum estimated in terms of interest. In coming to the conclu- Suhba R''°• J. sion which they did, the learned Judges relied upon the decision of the Judicial Committee in Inglewood Pulp and Paper Co., Ltd. v. New Burmwick Electric Power Commission(') and that of the Madras High Court in Re•'enue Dhisional Officer, Trichinopoly v.

Venkatarama Ayyar(").

In the former, the Judicial Committee directed the purchaser who had taken delivery and possession of the property he had purchased before the sale to pay interest to the vendor on the purchase money from the date he had taken possession on the ground that "the right to receive interest takes the place of the right to retain possession and is within the rule"; and in the latter, though it arose under the Land Acquisition Act. possession was taken by the Government under circumstances falling outside the scope of ss. 16 and 17 of the said Act. In both the cases the title did not pass to the vendee in one case and to the State in the other when possession was taken by them and, therefore, it may be said that the owner was given interest in place of his right to retain possession of the property.

But in a case where title passes to the State. the statutory interest provided thereafter can only be regarded either as representing the profit which owner of the land might have made if he had the use of the money or the loss he suffered because he had not that use. In no sense of the term can it be described as damages or compensation for the owner's right to retain possession, for he has no right to retain possession after possession was taken under s. J 6 or s. J 7 of the Act. We, therefore, hold that the statutory interest paid under s. 34 of the Act is interest paid for the delayed payment of the compensation amount and, therefore, is a revenue receipt

~ liable to tax under the Income-tax Act.

The order of the

~ High Court is, therefore, correct.

In the result, the appeal fails and is dismissed with costs.

Appeal dismissed.

<') A.LR. 1928 P.C. 287. (') A.LR. 1936 Mad. 199.

J4P{D)ISCI-22n).

SHAMLAL NARULA

COMMISSIONER OF INCOME-TAX, PUNJAB

K. SUBBA RAO, J

C. SHAH ANDS. M. SIKRI, JJ

Income-tax Act

ss. 3, 4

Land Acquisition Act, 1894

s. 34

Income-tax Act

Supreme Court

s. 34

s. 34

Income-tax Act

Commissioner of Income-tax, Madras

Shaw Wallace

s. 34

Shamlal Nanda

s. 16

s. 17

Punjab High Court

N. Kripal

A. N. Kripal

Gopal Singh

R. N. Sachthey

SuBBA RAO

Su!Jba Rao

High Court of Punjab

s. 34

Land Acquisition Act, 1894

Shamlal Narula

PatiaJa

Patiala State Government

State of Patiala

Union of Pepsu

State of Punjab

October 6, 1953

September 30,

1955

December 1, 1955

June 14, 1957

Income-tax Appellate Tribunal

Shamlal Narula ceipt

s. 66

Subba Rao

Income-tax Act, 1922

section 34

Pepsu

30th September, 1955

Income-tax Act

s. 34

s. 34

Section 15

ss. 23

Section 23

s. 24

s. 23

s. 23

s. 23

Part V of the Act

s. 16

s. 11

s. 17

section 9

S"1iba Rao

s. 34

Schedule D and the General Rule

Wright

lnthat context it was contended that .money awarded as <lama~ ges forthe detention of money was not interest and had not the quality of interest: Lord Wright observed:

"The general idea is that he is entitled to compensation for the deprivation.

section 57

Bills of Exchange Act, 1882

s. 34

s. 34

s. 28

Allahabad High Court

Behari Lal Bhargava

Shamlal Naro

Section 28

B.V, ba Rao

s. 28

s. 34

Madras High Court

Income-tax Act

Central Government

Allahabad

Kerala High Court

ss. 16 and 17

s. 34

Income-tax Act