COMMISSIONER OF INCOME-TAX U.P. LUCKNOW

THE MAHESHWARI DEVI JUTE MILLS LTD. KANPUR

April 15, 1965

JK. SuBBA RAO, J. C. SHAH ANDS. M. SIKRI, JJ.J

J11c0Jne-ta.J..'-Salf of asset--Capit(il. receipt _or income.

To protect the interests of its members against loss resulting from over production, the Jute Mills Association provided that the members shall work their looms for a fixed number of hours and gave to its members facility of transferring "loom-ho.ui"S", that is, the number of hours for which the members were enhtled to work their factories. A member of the Association v.1as thereby permitted. in addition to the ''loom hours" allotted to that member, to work its factory for such "loom hours" as were transferred to it by another member. The respondent-assessee had transferred its surplus "loom hours'' whic.h it could not utilize during the assessment years, and received certain sums of money as consideration, \Vhich the Incometax Officer included in the respondent's total income liable for payment of income-tax. That order was confirmed by the Appellate Assistant Commissioner and the Tribunal, but the High Court on a reference, held in favour of the assessee.

In his appeal to this Court, the Commissioner contended that: The right to work for the allotted number of hours was an asset of the assessee capable of being transferred, and where it was a part of the normal activity of the assessee's business to earn profit by making use of its asset by either employing it in its own manufacturing concern or by letting it out to others, the consideration received for allowing the transferee to use that asset was income received from business and chargeable to income tax.

HELD: The High Court was right in holding that the receipts from sale of "loom-hours 11 were in the nature of capital receipts and were not taxable. (770 EJ

Distinction between revenue and capital in the law of income.- tax is fundamental. Tax is ordinarily not levied on capital profits: it is levied on income. Sale of stock-in-trade or circulating capital or rendering service in the course of trading results in a trading receipt; sale. of assets which the assessee uses as fixed capital to enable him to carry on his business results in capital receipt. The "loomhours" v.1ere the asset of the respondent, but their temporary user could not be granted. The transaction was therefore a sale of "loomhours", and when a businessman disposes of his capital for whatever reason, unless it is a part of his circulating capital, the receipt is capital and not income which is taxable. (769 E, Fl

Commissioner of Excess Profits Tax, Bombay City v. Sri Lakshmi Silk Mills, (1952] S.C.R. 1, distinguished.

Maheshwari Devi Jute Mills v. Commissioner of Income-tax U.P.

LT. Misc. Case. decided on 13th September 1962, overruled.

76.5

766 ~UPltEMli:

COURT

AEPOR1'.< (196.~] 3 ii.C.R.

CIVIL APPELLATE J URISDICflON: Civil Appeals Nos. 66 and A 67 of 1964.

Appeals from the judgment and decree March 28, 1961 of the Allahabad High Court in Income-tax Reference No. 165 of 1954.

S. V. Gupte, Solicit<; r-General, R. Ganapathy Iyer and R. N.

Sad1they, for the appellant (in both the appeals).

B A. V. Vfawanatha Sastri, S. Murthy and B. P. Maheshwari, for the respondent (in both the' appeals).

The Judgment of the Court was delivered by • Shah, J. The Maheshwari Devi Jute Mills Ltd. carries on the business of manufacturing jute goods and is a member oi the Jute Mills Association. To protect the members against loss resulting C from overproduction, members of the Association entered into an agreement dated January 9, 1932 called "the First Working Time Agreement" restricting hours of work. That agreement was to expire on December 11, 1944. With a view to continue the arrangement, a fresh agreement was d.ecuted on June 12, 1944. The preamble of the agreement was: D "Whereas the signatories generally as a consequence of over-production having been put to considerable losses and in general interests of the Members and their employees and of the association and the jute industry and trade in general etc ...................... have determined E that provisions similar to those contained in the Working Time Agreement should be entered into and continued in manner hereinafter appearing".

By cl. 4 of the agreement, the association imposed restrictions upon the hours of work of its members. The number of hours for which the members were entitled \o work their factories were called F "loom-hours". Allotment of "loom-hours" depended upon the number of looms installed in the factory of each member. By cl. 5 it was' provided that the number of working hours per week set out in the agreement represented the total number 'Of hours for which a member was entitled to work its registered complement of looms. Clause 10 prescribed the maximum number of "loom- G hours" for a mill with a complement of looms .exceeding 220.

Clause 13 provided for registration of "loom-hours" of each member of the association. Clause 6 of the agreement enabled members to be grouped if they happened to be under the control of the same ma:naging agents or who were combined by any arrangement or agreement for registration as ~'Group Mills". It was open to a mem- H ber of the Group Mills so registered te utilise the allotment of hours of work per week of other members in the same group who wern not fully utilising the hours of work allowed to them. By sub-cl. lbl a member was also entitled to transfer his surplus "loom-hours" to another member and upon suc, h transfer being duly effected and registered with the Association; the transferee was entitled. subject to certain conditi011s. to utilise "loom-hours" so 'transferred.

I 1

(', J, T. 1'. MAHRSHWARI Mn,1, s (Shah, J.)

The respondent was under the agreement allotted 220 x 7l hours per week. In the account year corresponding to the assessment yeu 1949-50, the preparatory section of the factory of the respondent was unable to work the looms for more than 48 hours a week, and with the sanction of the Association the respondent sold 220 x 24 "loom-hours" to the Nasl:.arpara Jute Mills and as consideration of the sale received Rs. 53,460/-. In the account year corresponding to the assessment year 1950-51 the respondent received from the Birla Jute Mills and Hanuman Jute Mills a total amount of Rs. 1,85,230/- for sale of surplus loom-hours.

In proceedings for assessment for the assessment years 1949-50 and 1950-51 the Income-tax Officer included in lhc total income of the respondent the amounts received by sale of "loom-hours" as revenue receipts liable to tax. The order of the Income-tax Officer was confirmed by the Appellate Assistant Cornmi,; sioner and. the Income-lax Appellate Tribunal. At the instance of the respondent, the Tribunal referred the following questicrn to the High Court of Judicature at Allahabad:

"Whether on the facts and in the circumstances of lhe case lhe receipts of the assessee by the ,.ale of loom-hours

amountin~ to Rs. 53,460/- anJ Rs. 1,85,230 Iin the

assessme11t years 1949-50 and 1950-51 respectively were revenue receipts liable to tax under ihc Indian Income-tax Act?"

The High Court answered the question in the negative. The Commissioner of Income-tax has preferred these appeals with certificate granted by the High Court under s. 66-A (2) of the Indian l ncome-tax Act.

The Tribunal held that the receipts in question were not capital receipts, nor were they of a casual or non-recurring nature.

The plea of the respondent that the receipts for sale of loom-hours arc not chargeable to tax because they arc, within the meaning of s. 4(3) (vii), casual and non-recurring, hlIS no substance. By cl. (3)

(vii) of s. 4 receipts which are not capital gains chargeable according to the provisions of s. I 2B and whih are not arising from business or the exercise of a profession, vocation or occupation or by way of addition to the remuneration of an employee are exempt from tax, if they are of a casual and non-recurring nature. But a receipt in the ordinary course of the assessee's business, even ll though it is casual br non-recurring. is by the express words used by the Legislature, taxable.

It is not the case of the Department that a business in "loomhours" was carried on by the respondent. It is also common ground that for imposing restrictions upon the number of working hours. no compensation was paid to the . .1bcrs by the association or by any other body: if it were, such compeasation being paid for agreeing to restraint on trade would be capital. To protect the

SUPREME

COURT RBl'ORTS [1965] 3 s.c.n.

interests of its members the Association provided that the mem A bers shall work their looms for a fixed number of hours and gave to its members facility of transferring the number of "loomhours". But by transferring "loom-hours" no interest in the looms or the machinery of the factory was being transferred: thereby merely a member of the Association was permitted in addition to the "loom-hours" allotted to that member to work its factory for B such "loom-hours" as were transferred to it by another member of the Association. In the proceedings before the Income-tax authorities, the Tribunal and the High Court, these "loom-hours" have been regarded as an asset belong to each member and in considering these appeals we do not think we would be justified C in allowing counsel to raise a contention (as was sought to be done) that "loom-hours" were in the nature of a privilege and were not an asset at all. The case has at all earlier stages been considered on the footing that by virtue of the covenant incorporated in the agreement between the members of the Association, the right to work for the allotted number of hours was an asset capable of being transferred, subject to the sanction of the Association.

The respondent was unable. on account of inefficiency of its preparatory section, to supply the requisite material for running the factory for 72 hours per week which it was entitled to do. It therefore transferred a fraction of the "loom-hours" allotted to it E to other members of the Association and in consideration of the transfer received in the two years in question substantial sums of money. The Solicitor-General submitted that where it is a part of the normal activity of the assessee's business to earn profit by making use of its asset by either employing it in its own manufacturing concern or by Jetting it out to others, consideration re- F cehed for allowing the transferee to use that asset is income received from business and chargeable to income-tax. In support of his contention counsel relied upon the judgement of this Court in Commissioner of Excess Profits, Bombay City v. Shri Lakshmi

Silk Mills Ltd.('). In Shri Lakshmi Silk Mills Ltd. case the assessee Company was a manufacturing concern and had for the G purpose of its business installed a plant for dyeing silk yarn. For a part of the chargeable period the Company could not secure silk yarn .and its plant remained idle. The Company then let out the plant and the question arose whether rent received by the Company was chargeable to excess profits tax as profit of the business or was income from other sources and therefore not B

chargeable to excess profits tax. It was held by this . Court that if a commercial asset is incapable of being used as such, rent received by letting it out to others is not income of the business. But an asset acquired and used for the. purpose of the business does not cease to be a commercial asset of that business as soon as it is

(') ri902] S.C.R. l: 20 I.T.R. <151.

C.I.T. V, MAHESHWARI MILLS(Shah, J.) 769

A temporarily put out of use or is let out to another person for use in his business or trade. Receipt by the exploitation of a commercial asset is the profit of the business, irrespective of the manner in which the asset is exploited by the owner of' the business, for the owner is entitled to exploit it to his best advantage either by using it himself personally 'or by letting it out to somebody else.

B What was let out in Lakshmi Silk Mills' case(') was the dyeing plant which continued to remain the property of the Company and it was temporarily let out when the assessee was unable to use it. Receipt from a commercial asset when it is capable of being used by the assessee but is not so used because of circumstances which necessitate cesser of its use would undoubtedly be income, 0 where the asset remains the property of the assessee and user of the asset is given to another person. If in the present case, for the hours which the respondent was unable to use itS looms the respondent had permitted some other person to work the looms, profits received for permitting such user would be income. But the distinction between that case and the present case arises from the pecu- D liar nature of the transaction in "loom-hours". "Loom-hours"

cannot from their very nature be let out while retaining property in them, for there can be no grant of a temporary right to use

"loom-hours". "Loom-hours" are the asset of the respondent, but temporary user of the "loom-hours" cannot be granted. The E transaction in this case is of sale of "loom-hours". There is no doubt that when .a businessman disposes of his capital for whatever reason, unless it is a part of his circulating capital, the receipt is capital and not income which is taxable.

Distinction between revenue and capital i11 the law of incometax is fundamental. Tax is ordinarily not levied on capital profits: F it is levied on income. It is well-settled that sale of stock-in-trade or circulating capital or rendering service in the course of trading results in a trading receipt: sale of assets which the assessee uses as fixed capital to enable him to carry on his business results in capital receipt.

G Our attention was invited to a judgment of the Allahabad High Court in Maheshwari Devi Jute Mills v. Commissioner of Income-tax, U.P., Lucknow(') in which a Division Bench of the Allahabad High Court answered a similar question relating to taxability of payments received for sale of "loom-hours" by the respondent in an assessment year with which we are not concerned in H these appeals. The Court in that case ignoring the view in the judgments under appeal held that "loom-hours;, did not form the fixed profit-making structure of the respondent and it was not correct to say that the capital structure of the business was 220 looms multiplied by the number of hours per week for which' the machinery

(1) [1'152] S.C.R. I; 20 I.T.R. <51.

( 2) I.T. Misc. Case No. 177 of 1960 decided on September 13, 1962.

770 1~11: 000.T. HPOaTI [198i] 3 1.c.Jt.

was entitled to work. The "loom-hours" had in the view of the A Court noth.ing to do with th.e capital structure of the business and there was nothing to show that the defect in Jhe preparatory section which rendered the "loom-hours" unutiliSable was permanent.

It was always open to the respondent to acquire th.e necessary yam 'from outside and thereby utilise the remaining quota of "loomhours" in manufacturing jute, and if the respondent preferred not B' to procure yarn .and chose to sell the surplus "loom-hours" and thus ensure profit for itself without incurring any risk, the receipt by disposal of a commercial asset was profit of the business irrespective of the manner in which that asset was exploited by the owner of the business. In the view of the High Court the respondent was tntitled to exploit the asset to its best advantage: it may do so C either by utilising it personally or by letting it out to somebody else, and the sale of a part of its quota of "loom-hours" amounted to exploitation of its capital asset and the receipt obtained therefrom was income. We are .unable to agree with this view. The.surplus "loom-hours" were disposed of and no interest remained D therein with the respondent: there was no exploitation of the "loom-hours" by permitting user while retaining ownership. Receipt by sale of ''loom-hours" must therefgre be regarded in this case 1IS a capital receipt and not income.

In our judgment the High Court was right in holding that the receipts from sale of "loom-hours" were in the nature of capital B receipts and were not taxable. The appeals fail and are dismissed with costs.

Appeals dismissed.

... •

COMMISSIONER OF INCOME-TAX U.P. LUCKNOW

April 15, 1965

JK. SuBBA RAO, J.

C. SHAH ANDS. M. SIKRI, JJ

Jute Mills Association

S. V. Gupte

R. Ganapathy Iyer

R. N.

B A. V. Vfawanatha Sastri

S. Murthy

B. P. Maheshwari

Shah

January 9, 1932

December 11, 1944

June 12, 1944

cl. 4

cl. 5

Clause 10

Clause 13

Clause 6

Birla Jute Mills

Hanuman Jute Mills

Cornmi

High Court of Judicature at Allahabad

Indian Income-tax Act

s. 66

s. 4(3)

s. 4

Lakshmi Silk Mills Ltd.

Lakshmi Silk Mills

Allahabad High Court

September 13, 1962


COMMISSIONER OF INCOME-TAX, BANGALORE v.

SHAHMOHANDASSADHURAM

April 15, 1965

(K. SUBBA RAO, J. C. SHAH AND S. M. SIKRI, JJ.]

Indian Income-tax Act (11 of 1922), s. 26A-Minors as partners of a firm-G11ardian, if can contract on minor's behalf-Whether such C partnership could be registered.

The assessee-firm claimed registration under s. 26A of the Indian Income Tax Act on the strength of a partnership deed executed between four partners of which t\vo were minors. The Income Tax Officer refused registration on the ground that the minors were made parties to a contract by the eldest brother acting on their behalf and the minor had actually been debited with a share of loss. This was D upheld by the Appellate Assistant Commissioner, but the Appellate Tribunal, on a further appeal. construed the deed as having admitted the minors only to the benefits of the partnership, and accordingly held that the assessee w'1s entitled to be registered. In reference, the High Court answered the question in favour of the assessee. In appeal by certificate to this Court, the Revenue contended that (i) a guardian is not entitled to contract on behalf of a minor and the deed E was consequently void, and (ii) the partnership deed made the minors as full partners.

HELD: The assessee-firm was entitled to be registered under the Income-tax Act. (776 HJ

(i) As long as a partnership deed does not make a minor full partner a partnership deed cannot be regarded as invalid on the ground that a guardian has purported to contract on behalf of a minor. A guardian can do all that is necessary to effect the conferment and receipt of the benefits of partnership. So he must have the pawer to scrutinse the terms on which such benefits are received by the minor. He must also have the power to accept the conditions on which the benefits of partnership are being conferred. [775 G-H]

(ii} The Partnership deed reasonably construed, only conferred G benefits of partnership on the two minors and did not make them full partners.

Case law referred to.

OVIL APPELLATE JurusmCllON: Civil Appeals Nos. 144-145 H of 1964.

Appeals from the order dated November 16, 1960 of the Mysore High Court in Income-tax Reference No. 3/1959.

N. D. Karkhanis and R. N. Sachthey, for the appellant (in both the appeals).

R. Ganapathy Iyer, for the respondent (in both the appeal!l).

77i

SUPREME

COURT

RIWORTS [1965] 3 s.c.R.

The Judgment of the Court was delivered by A

Sikri, J. These two appeals pursuant to a certificate granted by the High Court of Mysore under s. 66-A(2) of the Income-tax Act, 1922, are directed against its judgment answering the question referred tQ it in favour of the respondent-assessee. The question referred to is: B "Whether the assessee, Mohandas Sadhuram, can be granted registration under Section 26-A of the Indian Income Tax Act on the basis of the partnership deed made ,1n 1-4-1952 for the assessment.year 1953-54 and on the basis of the said deed read with the supplementary deed on 1-4-1953 for the assessment year 1954-55".

The respondent, MI s Shah Mohandas Sadhuram, hereinafter referred to as the assessee, is a firm. The assessee claimed registration under s. 26-A of the Indian Income- Tax Act on the strength of a Partnership Deed executed on April 1, 1952. As the answer to the question in part turns on the construction of the deed, the re-

D . levant clauses may. be set out here. The Partnership Deed first describes the parties and then recites:

"Whereof the above four members were till this day members of a Joint Family, whereof yesterday that is on 31-3-1952 the said four members have 'tlecome divided not only in interest but also by metes and bounds, each E of the said members taking to his share one fourth (! / 4) of the said joint family assets and liabilities as detailed in the books of account as maintained by the fim1 known as Seth Mohandas Sadhuram and whereof we the first and second members have decided to constitute all the said four members as a partnership admitting the F third and fourth members thereof to the benefits of the said partnership but not to the liabilities thereunder". ·

The first and second members referred to in the recital are Atmaram and Doulatram, both majors.

The other relevant clauses are as follows: G

"(4) The said firm is agreed to do business of Banking and Commerce (which term includes all that is usually and customarily is understood to be done thereunder) and also to deal in Automobiles business. The Automobiles business having been started by the said first and H second members under the name and style of Vijaya Automobiles, Mysore, when they were members of the

said joint family as a partnership venture apart from the said family, it is agreed between us now that the said Automobiles business shall hereafter be continued to be done under the name and style of Vijaya Automobiles as part of the said firm.

C.J.T. V.

SHAH MOHANDAS (Sikri, J.)

(7) It is agreed that the capital contribution of each member will be equal and the accounts to be maintained to indicate the said capital contribution, will show what each member has so contributed in the personal capital ledger account.

(8) It is further agreed that after debiting all working expenses inclusive of those rererred to in para 6 supra, the profits of the firm less six pies per every rupee of profits which will be reserved for Charity Fuud will be distributed pro rata according to the proportion of capital investment as detailed of each member, all to be paid to his account in the books of account, from where each member can draw. The losses are agreed to be shared by the members in the like manner.

The share of profits for the 3rd and 4th member will be paid to them, the said profits to be credited to their ac: counts, and from there their maintenance charges and other expenses of necessities if any may be drawn by the said Guardian from the .said accounts.

(I 0) It is agreed that the duration of this partnership will be for a period of one year, i.e. from !st of April, 1952 to 31st March, 1953, and the members might agree to continue the said partnership even thereafter under these terms or on terms to be determined then.

(11) It is agreed that the profits and losses of the Bombay branch and other branches if any outside the State of

Mysore will be credited or debited separately in the books of account of these branches and final allocation made in those books of account. as distinct from the profits and losses of the firm .in State of Mysore.

(12) It is agreed that the first and the second members do maintain proper accounts as is customarily to be maintained".

G For the assessment year 1953-54, the Income Tax Officer rejected the application for registration on the ground that "in the case of the assessee, the minors are made parties to a contract by the eldest brother acting on their behalf. The minor has actually been debited with a share of loss. Taking these facts into account, I hold that the partnership is not entitled to the benefits of registra- H tion". For the assessment year 1954-55, he also rejected the application but added thi~ further ground that "a supplementary deed of partnership extending the life of the partnership beyond 1-4-1953 for a further period at the will of the partners is filed. This is on

10 annas stamp paper. (The supplementary deed rests on clause 10 of the ori3inal deed.) I have already held that the original deed is not registerable. The supplementary deed cannot confer any fresh rights in the matter".

774 SUPllllJJ

COURT RJJlOBT8

(19611) 3 S.C.R.

The f>ppellate Assistant Commissioner, on appeal, upheld the orders of the Income Tax Officer in respect of both the assessment years.

On further appeal, the Appellate Tribunal, following the decision of the Madras High Court in Jakka Devayya and Sons v.

Commissioner of Income-tax, Madras(') construed the deed as B having admitted the minors only to the benefits of the partnership.

It accordingly held that the assessee was entitled to be registered for both the years. At the instance of the Commissioner of Income Tax, the Tribunal referred the question already set out above to the High Court: The High Court, following its judgment in Income Tax Re- C ference No. 2 of 1959, which is the subject-matter of appeal before us in The Commissioner of Income Tax Madras v. MI s Shah

Jethaji Plm/chand(') answered the question in favom of the assess.ee. The main reason given in that judgment of the High Court is "that an instrument of partnership entered into between persons, some of whom are by law incompetent to contract, as D might happen if one of them is a minor, is not' necessarily null and void, and in a ca<e lil, e the present one, where the execution of the instrument of partnership on behalf of a minor by his guardian was for the purpose of admitting the minor to th_e benefits of partnership, no question of the invalidity of the instrumnt can proper Jy arise".

E Mr. Karkhanis, the learned counsel for the appellant contends that on a proper construction of the deed it is clear that the minors have been made partners, and therefore the deed is not valid. He relies on clauses 4, 7, 8, 10, 11 and 12 of the Partnership deed, set out above, to establish that the minors were admitted as full partners. He further urges that a guardian is not entitled to contract on behalf of a minor and the deed is consequently void.

This Court hele in Commissioner of Income Tax, Bombay v.

Dwarkadas Khetan & Co.(') that the income tax officer was only empowered to register a partnership which was specified in the instrument of partnership and it was nbt open to the Department to register a partnership different from that which was formed by the instrument. It further held that s. 30 of the Indian Partnership Act was designed to confer equal benefits upon the minor by treating him as a partner, but it did. not render a minor a competent and

full partner, and any document which made a minor full partner could not be regarded as valid for the purpose of registration. But B the facts in that case were that in the instrument of partnership Kantilal Kasherdeo was described as a full partner entitled not only to a share in the profits but also liable to bear all the lossess including loss of capital. It was also provided that "all the four partners

(') ( ) 22 I.T.R, 26i. (') Ciril Appe&ls Nos. 146·1'7 of 1964; judgment delivered on April 15, 1965. (') (t

) 41 I.T.R. 528.

('.I.T. V. SHAH llOHANDAS (Sikri, J.) 775

A were to attend to the business, and if consent was needed, aU the partners including the minor had to give their consent in writig.

The minor was also entitled to manage the affairs of the firm, mcluding inspection of the account books, and was given tlie right to vote, if a decision on votes had to be taken". As Hidayatullah J. observed, "in short, no distinction was made between the ault B partner and the minor and to all intents and purposes, the mmor was a full partner, even though under the partnership law he could only be admitted to the benefits of the partnership and not as a partner".

Does this deed then make the minors full partners or does it c only confer benefits of \>artnership on them? Is any clause of the deed void? Before we discuss these questions it is necessary to consider what are the incidents and true nature of 'benefits of partnership' and what is a guardian of a minor competent to do on behalf of a minor to secure the full benefits of partnership to a minor.

First it is clear from sub-s. (2) of s. 30 of the Partnership Act that a D minor cannot be made liable for losses. Secondly, s. 30, sub. s (-4)

enables a minor to sever his connection with the firm and if he does so, the amount of his share has to be determined by evaluation made, as far as possible, in accordance with the rules contain•

ed in s. 48, which section visualises capital having been contributed by partners. There is no difficulty in holding that this severance E may be effected on behalf of a minor by his guardian. Therefore, sub-s.(4) contemplates that capital may have been contributed on behalf of a minor and that a guardian may on behalf of a minor sever his connection with the firm. If the guardian is entitled to sever the minor's connection with the firm, he must also be held to be entitled to refuse to accept the benefits of partnership or agree F to accept the benefits of partnership for a further period on terms which are in accordance with law. Sub-Section (5) proceeds on the basis that the minor may or may not know that he has been admitted to the benefits of partnership. This sub-section enables him to elect, on attaining majority, either to remain a partner or not to become a partner in the firm. Thus it contemplates that a guardian G may have accepted the benefits of a partnership on behalf of a minor without his knowledge. If a guardian can accept benefits of partnership on behalf of a minor he must have the power to scrutinise the terms on which such benefits are received by the minor.

He must also have the power to accept the conditions on which the benefits of partnership are being conferred. It appears to us that H the guardian can do all that is necessary to effectuate the conferment and receipt of the benefits of partnership.

It follows from the above discussion that as long as a partnership deed does not make a minor full partner a partnership deed cannot be regarded as invalid on the ground that a guardian has purported to contract on behalf of a minor if the contract is for the purposes mentioned above.

'.f

SUPREME COURT REPORTS

[1965] 3 ", C, R:

Let us then examine the partnership deed in the light of these A principles. It need hardly be stated that the partnership deed must be construed re.asonably. The recital set out above expressly states that it is the major members who had decided to constitute the partnership and admit the minors to the benefits of the said partnership. The rest of the clauses must be construed in the light of this recital. Clause 4 only states the business to be carried bn and the B name of the business. It seems to us that the expression 'ii has been agreed between us' has reference to the agreement mentioned in the recital. Regarding clause 7, which deals with capital contribution, it is urged that a guardian is not entitled to agree to contribute capital, We are unable to agree. If it is one of the terms on which benefits bf partnership are being conferred either the guardian must C refuse to accept the benefits or he must accept this term. In some cases such an agreement by a guardian may be avoided by the minor, if it was not entered into for his benefit, but the agreement will remain valid as long as it is not avoided by the minor. .

Regarding clause 10, Mr. Karkhanis submits that this embo- D dies a clear agreement enabling the minor to continue the said partnership even thereafter umier these terms or on terms tb be determined then, and therefore this clause is void. We can find no defect in this clause. The duration of a partnership has to be fixed between the major members, and the guardian on behalf of a minor may agree to accept the benefits of the partnership only if the du- E ration is to the benefit of the minbr. Clause 10 enables the guardian to accept the benefits of partnership under these terms or under such other terms as may be determined. If the terms determined in future are similar, no objection can be taken; if on the other hand the terms determined later are in contravention of law, the partnership deed will be held to be bad. Clause 11 has refe- F rence to the manner of keeping acclmnts and a guardian is entitled to assent to the mode of keeping accounts.

In our opinion, the partnership deed, reasonably construed, only confers benefits of partnership on the two minors and does not make them full partners. The guardian has agreed to certain clauses in order to effectuate the decision of the major members to confer the benefits of the said partnership to the minors. Accordingly we hold that the Income Tax authorities should not have declined to register the firm. We may mention that the supplementary deed dated April 1, 1953, has not been included in the statement of the case, but it is common ground that nothing turns on H any bf the clauses in the supplementary deed.

Accordingly, agreeing with the High Court; we hold that the firm is entitled to be registered under s. 26-A of the Income Tax Act, and the answer to the question referred is in the affirmative.

The appeals are dismissed with costs, one set of hearing fees.

Appeals dismissed . •

COMMISSIONER OF INCOME-TAX, BANGALORE

v.

SHAHMOHANDASSADHURAM

April 15, 1965

K. SUBBA RAO, J.

C. SHAH

S. M. SIKRI, JJ.

Indian Income-tax Act

s. 26A

s. 26A

Income-tax Act

N. D. Karkhanis

R. N. Sachthey

R. Ganapathy Iyer

A

Sikri

s. 66

Income-tax Act, 1922

Section 26

Shah Mohandas Sadhuram

s. 26

Seth Mohandas Sadhuram

Atmaram

Doulatram

Vijaya Automobiles, Mysore

Vijaya Automobiles

C.J.T. V.

SHAH MOHANDAS

!st of April, 1952

31st March, 1953

Bombay

Mysore

clause 10

Madras High Court

Karkhanis

s. 30

Indian Partnership Act

Kantilal Kasherdeo

.I.T. V. SHAH llOHANDAS

Hidayatullah

s. 30

s. 30

s. 48

Clause 4

clause 7

clause 10

Clause 10

Clause 11

April 1, 1953

s. 26


NARAYANDAS SHREERAM SOMANI

THE SANGLI BANK LTD. (With connected appeal)

March 15, 1965

[A. K. SARKAR, J. R. MUDHOLKAR AND R. S. BACHAWAT, JJ.]

C Indian Companies Act (Act 7 of 1931), s. 91B(l)-Director interested in a!l-Otmeret of share~ Taking part in meeting-Effect.

Indian Contract Act (9 of 1872), s. 50, I!!us. (a)-Advance of !oan-Tf could be by entries in accounts.

The respondent-Bank was unatle to carry on business ilfter it was promoted, in view of s. 277 (1) of the Companies Act, 1•13, be- D cause its ; mbscribed capital was less than half the authorised capital. In order to comply with .the requiremeIJ\s of the section, the directors decided that they or their nominee~ would subscibe for a large number of shares. The first appellant was a director of the Bank and the se.cond appellant was the firm of the first appellant and his brother. The first appellant, decided to subscribe for 2000

shares in the names of 3 ladies of his family, and the allotments of shares were made at a meeting of directors at which the first ap- E pellant also voted. At that meeting and subsequently various loans were advanced to the second appellant. A sum of Rs. 100,000 which was shown as a loan to the brother was later on adjusted by crediting his account with that item and debiting the account of the first appellant with that amount. The first appellant executed a promissory note and a letter of pledge for the amount, andi the brother paid

F off the balance due from him after giving effect to the credit entry, and that loan account was closed. Suits were filed by the respondent e.gainst the appellants for realization of the sums due from them. The trial Court dismissed the suits but the High Court decreed them.

In their appeals to this Court the appellants contended inter a!ia that: (i) if the vote of the first appellant be not counted as required G by s. 91B(l) of the Act because of his interestedness in the allotment, there would be no quorum for tI:>e meeting and therefore the allotment of shares to the nominees of the first appellant would be invalid, and as the consideration for the shares was paid out of the loans, the appellants would not be liable to repay those loans; (ii) since no cash amount was paid and no loan advanced by the respondent to the first appellant the suit to recover the sum of Rs. 100,000 H as a loan was not maintainable.

HELD: (i) The allotment of the shares at the meeting, to the nominees of the first appellant was not void. In view of the fact that the first appellant was not entitled to vote on the allotment and after the exclusion of his vote there was no quorum, the allotment was icregular and the respondent was entitled to avoid it But. instead of avoiding the allotment the respondent has chosen to affirm it and so the allotment is valid and binding on the allottees. [783 E]

IUPRRKE

COYRT RiPoKTS

(1965) 3 8.C.R.

Moreover, the first appellant was a party to the .resolution allot- A ting shares and dealt with the shares on the footing that the allottees were the holders with a clear knowledge of all circumstances, and therefore, was estopped from contending that the allotment was invalid. (783 F-G]

(ii) To support a plea of payment, it is not necessary to show that cash passed. Illustration (a) to s. 50 of the Indian Contract Act, 1872.

show~ that payment may be made by means of transfer entries in books of account. [784 E]

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 801 and 802 of 1962.

Appeals from the judgment and decree dated August 11,1960 C of the Bombay High Court in first Appeals Nos. 819, 8?0 of 1955.

Purshottam Trikamdas, V. !. Jhaveri and S. N. And/ey for the appellants (in both the appeals). ·

K . .H. Bhabha, Iqbal Chagla and !. B. Dadachanji, for the D respondent (in both the appeals).

The Judgment of the Court was delivered by

Bachawat, J. The Bank of Poona Ltd., (hereinafter referred to as the Company) now amalgamated with the Sangli Bank, Ltd. E was incorporated in 1945. The Company was promoted by N. G.

Parulekar and Murlidhar Chaturbhuj Loya. The authorised capital of the Company was Rupees fifty lakhs divided into 50,000 ordinary shares of Rs. 100/· each. By the end of April, 1946, the Company was able to find subscribers for 4,860 shares only. In view of s. 277(1) of the Indian Companies Act, 1913, the Com- F pany was unable to carry on business unless the subscribed capi ta! was not less than half the authorised capital. In order to comply with the requirements of s. 277(1); the directors of the Com pany decided that they or their nominees would subscribe for large number of shares. Narayandas Shriram Somani was one of the directors of the Company. Ramnath Shriram Somani is his G brother. They carried. on business in the name. of Ramkisan Ramratan Somani. Jivanbai is the mother of Narayandas and Ramnath Goverjabai is the wife of Narayandas, and Kamalabai is the wife of Ramnath. Narayandas decided to subscribe for 2000 shares in the names of the three ladies. At a meeting held on May 25, 1946, the board of directors of the Company allotted 500 shares to Gov- B erjabai, 500 shares to Kamalabai and 1000 shares to Jivanbai against three separate applications for shares signed by them. The applications were accompanied by three separate hundis dated May 25, 1946 for Rs. 25.000, Rs. 12,500 and Rs. 12,500 drawn by Narayandas in favour of the Company. The meeting of May 25, 1946 was attended by three directors, Murlidhar Loya, D. R. Nayak and Narayandas. At that meeting. the directors also sanctioned a

A loan of Rs. 60,000 to Ramnath. On May 28, 1946, Ramnath obtained from the Company the loan of Rs. 60,000 against his promissory note, and a separate loan account No. l / 18 was opened in his name in the books of the Company. The three hundis were honoured on May 29, 1946. The directors of the Company at a meet- B ing held on June 8, 1946 resolved to give an overdraft of Rs. 40,000

to Ramnath. A separate overdraft account L.A. IC No. 71 in the name of Ramnath was opened in the books of the Company, and Ramnath obtained the sanctioned overdraft by a cheque dated June 27, 1946 for Rs. 15,000/- and another cheque dated June 29, 1946 for Rs. 25,000. The balance of the application and allot- C ment moneys amounting to Rs. 12,500, Rs. 12,500 and Rs. 25,000 in respect of the shares of Goverjabai, Kamalabai and Jivanbai were paid to the Company on June 22, June 28 and June 29 respectively. There is reason to believe that the subscription of the 2000 shares was financed by the advances to Ramnath.

On December 28, 1948, Ramnath was indebted to the Company in his loan account for Rs. 65,743-6-6 and in his overdraft account for Rs. 41,909-10-0. On that date, both accounts were closed, and a new loan account No. 9 with a debit of Rs. 1,09,500/- was opened in the name of Ramnath, who executed a promissory note. The Reserve Bank of India was pressing the Company to take steps in respect of the advances to Ramnath. In these circumstances, Ramnath repaid to the Company Rs. 18,500 /- on December 29, 1950 and Rs. 1,500/- on January 2, 1951. At the same time, on January 6, 1951, the Company gave a new loan of Rs. 20,000 /- to Ramkisan Ramratan Somani and Ramnath, and the borrowers executed a joint and several promissory note in fa- F vour. of the Company for the sum of Rs. 20,000/-. In respect of this loan, a separate loan account was opened in the books of the Company. In his loan account No. 9, Ramnath repaid Rs. 1,00,000/- on December 27, 1951 and Rs. 4,198-8-0 on December 29, 1951, and as a result of the last payment, the account was closed. The above sum of Rs. 1,00,000/- was paid on behalf of Ramnath by Narayan- G das, who on the same date obtained a loan of Rs. 1,00,000 /- from the Comgany. On the same date, Narayandas executed a promissory note for the sum of Rs. 1,00.000 /-, a letter of pledge and trust receipt in respect of cloth, saris etc., valued at Rs. 1,50,000/-, and a separate loan account No. 6/ 184 in his name was opened in the books l'lf the Company.

H In spite of demands, the Company was unable to realise its dues in respect of the outstanding loans. On March 18, 1954, the Company instituted Special Suit No. 39 of 1954 in the Court of the Civil Judge, .Senior Division of Poona, against Ramki'san Ramratan Somani and Ramnath for the recovery of Rs. 22,964-13-0 due from them in respect of their loan account and the promissory note dated January 6, 1051. The suit was dismissed by the trial .JP{N)5SC1-· 1 l

Court on April 23, 1955, but in First Appeal No. 819 of 1955 pre- A ferred by the Company, the High Court decreed the suit. Civil Appeal No. 801 of 1962 arises out of this claim. On April 24, 1954, the Company instituted Special Suit No. 78 of 1954 in the Court of the Civil Judge, Senior Division, Poona against Narayandas for the recovery of Rs. 1,09,099-14-4 due from him in respect of the loan account No. 6/ 184 and the promissory note dated December B 27, 1951. On April 23, 1955, the trial Court dismissed the suit, but in First Appeal No. 820 of 1955 preferred by the Company, the High Court decreed the suit. Civil Appeal No. 802 of 1962 arises out of this claim.

On behalf of the appellants, Mr.

Purushottam Tricamdas C contended that the a!Iotment of the 2000 shares and the several loans in the names of Ramnath and Narayandas were not genuine transactions, and that the parties did not intend that the allottees would be the holders bf the shares or that Narayandas and Ramnath would be liable to repay the loans. It is to be noticed that the D plea that the allotment of the 2000 shares was not intended to be operative, was not sufficiently raised in the pleadings. Narayandas pleaded in his written statement that at the time of the purchase of the shares, Loya and Parulekat gave him and Ramnath the assurance that the sum of Rs. 1,00,000 /- required for the purchase of the shares would be paid by the Company on interest at 4! per cent E per annum and Loya and Parulekar would no.t demand and recover the amount but they would sell the shares and credit the amount of the sale proceeds towards the principal and interest in the loan account and would not allow Narayandas and Ramnath to suffer loss with regard thereto. Narayandas swore that it was agreed between him, Parulekar and Loya that he .would nominally take the 2000 shares which would be finally sold to others and he would F tie out of liability and he ; md Ramnath would not repay the loans nor take any benefit thereunder. He also suggested that he or Ramnath did not repay any moneys out of their own pocket, and all repayments in the accounts were made out of the moneys received by him from the Company. At the trial, the Company did not G examine either Loya or Parulekar. It may be that Loya and Parulekar gave some understanding to Narayandas with regard to the disposal of the shares, and in view of this understanding, they subsequently executed in. favour of Narayandas two letters dated December 27, 1951, whereby Parulekar agreed to buy from him 500 shares and Loya agreed to buy from him 800 shares. But these B assurances, if any, were given to Narayandas by Parulekar and Loya . in their individual capacity and not as directors of the Company.

There is no record of any assurance given on behalf of the Company to Narayandas in the minutes of the board meetings. Narayandas and his nominees, Goverjabai, Kamalabai and Jivanbai dealt with the shares on the footing that they were the owners of the shares. some of the shares were transferred to third parties under transfer

A deeds executed by Jivanbai, and the sale proceeds were credited to the loan account of Narayandas. Jivanbai received from the Company all the 1000 shares allotted to her and executed a receipt dated February 25, 1953. Narayandas obtained from Loya and Parulekar written undertakings dated December 27, 1951 for the purchase of 800 and 500 shares respectively. By letter dated June 28, B 1954, Narayandas called upon Parulekar to fulfil his undertaking for the purchase of 500 shares. All these circumstances prove that the allotment of the 2000 shares was intended to be operative and the allottees were intended to be the holders of the shares. Ramnath out of his own funds paid several sums of money towards discharge of his indebtedness in the loan accounts.

He paid C Rs. 750.4-0 in the overdraft account towards interest on December 12, 1946 and Rs. 1,484-7-0 in the loan account No. 1/18 on April 21, 1947, and we are not satisfied that these sums were paid out of commission earned by Narayandas from the Company. Similarly, on December 29, 1951, he paid Rs. 4,198-8-0 in the loan account No. 9 and on January 4, 1954, Rs. 100 I - was paid by D Ramkisan Ramratan and Ramnath in their loan account. The loan accounts were secured by promissory notes. Moreover, the loan account of Narayandas was secured by a trust receipt and a letter of pledge. Even on March 3, 1953, Narayandas executed a letter in favour of the Company declaring that he held as security a stock of sarees valued at Rs. 1,50,000 /-. In respect t>f other E loan transactions, the Company charged the appellants interest at the rate of 6 per cent and those loans were repaid quickly. But the loan transactions in suit were intended to be of a more permanent nature, and in order to accommodate Narayandas and Ramnath, the Company agreed to charge interest at 4t per cent. We are F satisfied that the allotment of the 2000 shares was intended to be operative and the allottees became the owners of the shares. We are also satisfied that the loans to Ramnath and Narayandas. were intended to be operative, and the Company did not give any assurance to them that they would not be called upon to repay the loans.

G The next contention of Mr. Purushottam Tricamdas arises in this way, Article 126 of the articles of association of the Company provides that the directors may determine the quorum necessary for the transaction of business, and unless and until otherwise determined, three directors shall be the quorum. The directors did B not make any other determination with regard to quorum, and at all material times, a quorum of three was required for a directors' meeting. The board meeting of May 25, 1946 was attended by three directors only, namely, M. C. Loya, D. R. Nayak and Narayandas. At this meeting, the directors resolved to allot 2000 shares to the nominees of Narayandas. Narayandas was clearly interested in the allotment of the shares. Section 91B(l) of the Indian Companies Act, 1913 provided that "No director shall, as a director,

vote on any contract or arrangement in which he is either direct- A ly or indirectly concerned or interested nor shall his presence count for the purpose of forming. a quorum at the time of any such vote; and if he does so vote, the vote shall not be counted".

The Poona Bank, Ltd. was a public company, and s. 91B(l) applied to its directors. Narayandas, therefore, ought not to have voted at the meeting of May 25, 1946. If his vote is excluded, there B was no quorum for the meeting.' Mr. Purushottam Tricamdas, therefore. contended that the allotment of 2000 shares to the nominees of Narayandas at this meeting was invalid and no title passed to the allottees in respect of the shares, and in the circumstances, there was a total failure of the consideration paid for the shares, and as the consideration was paid out of the loans, the ap- C pellants are not liable to repay the sam~.

Now, a director of a company stands in a fiduciary position towards the company and is .bound to protect its interests. For long, it has been an established rule of equity that he must not place himself in a position in which his personal interest conflicts D with his duty, and unless authorised by the company's articles, he must not vote as a director on any contract or arrangement in which he is directly or indirectly interested. Standard articles give effect to this rule of equity. See Palmer's Company Precedents, 17th Edn, Part I, p. 553. If he votes in such a case, his vote would E not be counted, and his presence wouldnot count towards the quorum, that is to say, the minimum number fixed for the transaction of business by a board meeting, for a quorum must be a disinterested quorum, and must be comprised of directors• who are entitled to vote on the particular matter before the meeting. See In re. Yuill v. Greymouth Point Elizabeth Railway and Coal Company.

F Limited('). If an interested director votes and without his vote being counted there is no quorum, the meeting is irregular, and the ' contract sanctioned at the meeting is vo'dable by the company against the director and any other contracting party who J:\as notice of the irregularity, see Transvaal Lands Company v. New Belgium (Transvaal) Land and Development Company('); but the company G may waive the irregularity and affirm the transaction. The matter is put succinctly by Gore-Browne in Handbook on Joint Stock Companies, 41 st Edn., p. 363 thus:

"According to the well-established rule that an agent cannot act on behalf of his principal in a matter in which the agent has a conflicting interest or duty, directors are H µrecluded from taking part in any resolution under which they take a benefit or which adopts a contract that concerns them unless the Articles authorises their doing so. It must be here noted that if interested directors take part in any transaction there is an irregularity

(') [1904] I Oh. 32. (') [1914] 2 Ch. 4"88.

NARAYANDAS v. BA1'K Ok' POONA (Bachawat, J.) i83

which renders the transaction voidable by the company as against the directors and any persons who have knowledge of the facts".

Section 9 IB embodied the existing rule of equity in the form of a statutory provision. In Pratt (Bombay) Ltd. v. M. T. Ltd. and B Sassoon & Co. Ltd. v. Pratt (Bombay) Ltd.('), Sir George Rankin observed that the section is a concise statement of the general rule of equity explained in the Transvaal Lands Company's case('), and he pointed out that the impugned transactions on which the interested directors had voted, were voidable by the official liquidator of the company. The voting by the interested director, of- C itself, does not invalidate the contract. The effect of s. 91B is that the vote of the interested director must be excluded, and if as a result of such exclusion there is no quorum, the resolution sanctioning the contract is irregular and the contract is liable to be avoided by the company against the directors and any other contracting party having notice of the irregularity. Section 9 lB is D meant for the protection of the company, and the company may, if it chooses, waive the irregularity and affirm the contract.

We think that the allotment of the 2000 shares to the nominees of Narayandas in the meeting of the directors of the company held on May 25, 1946 was not void. Jn view of the fact that E Narayandas was not entitled to vote on the allotment and after exclusion of his vote there was no quorum, the allotment was irregular, and the Company was entitled to avoid the allotment. Instead of avoiding the allotment, the Company has chosen to affirm it. The allotment is, therefore, valid and binding on the allottees.

F Moreover, Narayandas cannot be heard to say that there was no valid allotment of the shares. For the purpose of satisfying the requirement of s. 277(1) it was necessary to allot the shares, and he allowed the Company to commence business on the footing that the shares had been_ subscribed. He was a director of the Company and a party to the resolution allotting the shares. He dealt with G the shares on the footing that the allottees were the holders of the shares with a clear knowledge of the circumstances on which he might have founded his present objection. He cannot now be heard to say that he was interestoo in the allotment and could not vote. Like the director in York-Tramways Company v.

Willows('), he is now estopped from contending that the allotment is invalid. For all these reasons, we hold that the allotment is valid, and there is no failure of consideration.

In the plaint in Suit No. 78 of 1954, the Company pleaded that on December 27, 1951 Narayandas took from it on loan a sum of

(I) I.1.R. [1938] Born. 421. 1'1 [1914] 2 Ch. 488. 1'1 [18821 8 Q.B.ll. 685.

SUPREME

COUIIT llllPOIITS [1965] 3 s.c.11.

Rs. l,00,000/- and executed an on-demand promissory note for A the amount. Mr. Purushc; ittam Tricamdas contended that, as a matter of fact, no cash amount was paid and no loan was advanced by the Company to Narayandas on December 27, 1951, and consequently, the suit as framed is not maintainable. Now, at the relevant time, Ramnath was indebted to the Company for Rs. 1,04,198/- in respect of loan account No. 9. On December 27, B 1951, at the request of Narayandas, the Company credited Ramnath with Rs. 1,00,000/- in his Joan account and debited Narayandas with Rs. 1,00,000 /- in a new loan account opened in his name. On the same date, Narayandas acknowledged in writing the receipt of Rs. 1,00,000/- and executed a promissory note for the amount in favour of the Company. Ramnath took full advantage C of the credit of Rs. 1,00,000 /- and on payment of the balance of Rs. 4,198-8-0 closed his loan account No: 9. Though no actual money passed, the two entries in the books of account amounted to .payment of Rs. 1,00,000/- by the Company to Narayandas by way of a loan and repayment of the same attrount by Narayandas to the Company towards discharge of the indebtedness of Ramnath ; n the D latter's loan account with the Company. The result was as if the Company had paid a sum of Rs. 1,00,000/- in cash to Narayandas and then Narayandas had returned the amount to the Company with instructions to credit it to Ramnath. To support a plea o' payment, it is not necessary to show that cash passed. Illustra- E ti m (a) to s. 50 of the Indian Contract Act, 1872 shows that payment may be made by means of transfer entries in books of account. The Company has sufficiently established a payment of Rs. 1,00,000/- by it to Narayandas by way of loan on December 27, 1951.

Mr. Purushottam Tricamdas contended that the loans to Na- F rayandas and Ramnath were financial assistance by the Company for the purpose of or in connection with the purchase of its shares by Narayandas or his nominees, and the loans being in contravention of s. 54A(2) of the Indian Companies Act, 1913 were illegal and could not be recovered. Mr. K. N. Bhabha contended G (I) that the appellants ought not to be allowed to take this new point in this appeal; (2) the lending of the money was a part of the ordinary business of a banking company and the loans to Ramnath and Narayandas were made by the Company in the course of its business; and (3) having regard to the decision in Re V.G.M.

Holdings, Ltd('), the word "purchase" in s. 54A(2) did not include H the acquisition of shares by subscription or allotment, and in this case, the loans were given in connection with the acquisition by Narayandits or his nominees of shares by subscription.or allotment. and not in connection with acquisition of shares by purchase, and consequently, s. 54A(2) had no application. Now, it appears that in paragraph 15 of his written statement Narayandas pleaded that

(') [1942] 1 All E.R. 234.

A the advance of loans to him in connection with the purchase of shares was illegal, but no issue was raised on the question whether the loans were financial assistance in connection with the purchase of the shares and were in contravention of s. 54A(2). There is a passing reference to this contention in paragraph 15 of the judgment of the trial Court, but there is no reference to it in the judgment of B the High Court. We find also that this contention finds no place in the statement of the case filed on behalf of the appellants. Mr. Purushottam Tricamdas relied on ground No. 12 of the appellants statement of case, but, we think that this ground is wholly insufficient to raise this contention. In these circumstances, we think that it is c not open to the appellants to urge this contention, and we indicated this to Mr. Purushottam Tricamdas in the course of the argument.

In the Courts below, the appellants contended that Kama!abai was a minor, and, therefore, the allotment of 1000 shares to her was invalid. This contention is no longer pressed, and does not survive.

D No other contentions were advanced before us.

In the result, the appeals are dismissed with costs, one hi:aring fee.

Appeals dismissed.

NARAYANDAS SHREERAM SOMANI

THE SANGLI BANK LTD

March 15, 1965

A. K. SARKAR, J.

R. MUDHOLKAR

R. S. BACHAWAT, JJ.

Indian Companies Act

s. 91B(l)

Indian Contract Act

s. 50

s. 277

Companies Act

s. 91B(l)

s. 50

Indian Contract Act, 1872

Purshottam Trikamdas

V. !. Jhaveri

S. N.

K . .H. Bhabha

Iqbal Chagla

. B. Dadachanji

Bachawat

Bank of Poona Ltd.

Sangli Bank, Ltd.

N. G.

Parulekar

Murlidhar Chaturbhuj Loya

s. 277(1)

Indian Companies Act, 1913

s. 277(1)

Narayandas Shriram Somani

Ramnath Shriram Somani

Ramkisan Ramratan Somani

Jivanbai

Narayandas

Ramnath Goverjabai

Kamalabai

Ramnath

May 25, 1946

Gov- B erjabai

Murlidhar Loya

D. R. Nayak

May 28, 1946

May 29, 1946

June 8, 1946

June 27, 1946

June 29, 1946

Goverjabai

June 22, June 28 and June 29

December 28, 1948

Reserve Bank of India

December 29, 1950

January 2, 1951

January 6, 1951

December 27, 1951

December 29, 1951

Narayan- G das

March 18, 1954

Ramki'san

January 6, 1051

April 23, 1955

April 24, 1954

Civil Judge, Senior Division, Poona

December B 27, 1951

Purushottam Tricamdas

Loya

Parulekat

Parulekar

February 25, 1953

June 28, B 1954

December 12, 1946

April 21, 1947

January 4, 1954

D Ramkisan Ramratan

March 3, 1953

Article 126

M. C. Loya

Section 91B(l)

Indian Companies Act, 1913

Poona Bank, Ltd.

s. 91B(l)

Palmer

Gore-Browne

Section 9

George Rankin

Transvaal Lands Company

s. 91B

Section 9

E Narayandas

s. 277(1)

Purushc

ittam Tricamdas

December 27, B 1951

s. 50

Indian Contract Act, 1872

Na- F rayandas

s. 54A(2)

Indian Companies Act, 1913

K. N. Bhabha

s. 54A(2)

Narayandits

s. 54A(2)

s. 54A(2)

Kama!abai


THE MADHYA PRADESH STATE ROAD TRANSPORT

CORPORATION

mE REGIONAL TRANSPORT AUmORITY, RAIPUR B

April 15, 1965 IP. B. GAJENDRAGADKAR, c. J., K. N. WANCHOO, M. HIDAYATULLAH

AND V. RAMASWAMI, JJ.]

Motor Vehicles Act, (4 of 1939), s. 62--Scope of. c

In February, 1963, the first respondent, Regional Transport Authority, granted a permit to the third respondent for running a town bus service in Raipur, but as the latter was unable to pUt the service into operation, the permit was revoked in September,· 1964.

Thereafter, the first respondent granted a temporary permit to the appellant for a period of two months and in November, 1964 pending D the grant of a permit for permanent regular operations, granted a :; econd temporary permit to the appellant for four months.

The third respondent thereupon filed a petition in the High Court for a writ of certiorari to quash the order of the first respondent granting a temporary permit to the appellant on the ground, inter atia, that such grant was in violation of s. 62 of the Motor Vehicles E Act. The High Court allowed the petition, being of the view that a temporary permit could not be granted for any route when there was a permanent need for providing transport facilities on that route and it had been decided to invite applications for that purpose. In the appeal before this Court, it was a1so contended that the provision in s. 62 that a temporary permit could be granted for a period not "in any case" to exceed four months meant that under no circumstances could a temporary permit be granted on any route for more than a I' total period of four months.

On the other hand, it was the appellant's contention that in the -circumstances of the case~ there was a "particular temporary need"

within the meaning of s. 62(c) and the High Court was in error in taking the view that whenever there was a permanent need, there could be no temporary need. •· G HELD: (i) The Regional Transport Authority was right as a matter of law in granting a temporary permit to the appellant under s. 62(c) of the Act in the circumstances of the case. [WOC]

After the regular permit granted to the third respondent was <:ancelled, in view of a . shortage of transport vehicles on the route the Regional Transport Authority thought it fit to provide for this H temporary need until permanent regular operations could be introduced in accordance with the procedure prescribed in s. 57. There was no reason why the clause "to meet a particular temporary need" should be given any special or restricted meaning. There is no antithesis between a particular temporary need and a permanent need and it is manifest that these two kinds of need may co-exist on a particular ro11te. [789 G-HJ

. '

<ii) The words "in any case" in s. 62 do not mean "in any circumstance". The section means that at any one time the Transport Authority is not permitted to issue to any person a temporary permit for a period exceeding 4 months; but if the temporary need per sists then, except where an abuse of the power is shown, it would be permissible to grant a second temporary per.nm to .meet the temporacy need.

[790 D-F) ·

Jairam Dass v. Regional Transport Authority, I.L.R. 1956 Rajasthan 1053; Chandi Praood Mahajan v. The Regional Transport Authority, Gauhati, I.L.R., 1952, Assam 9, approved.

Sri Rama Vilas Service Ltd. v. The Road Traffic Board, Madras, A.I.R., 1948 Madras 400, Balagangadharan v. Regional Transport Board, Quilon, A.LR., 1958, Kerala 144, Shah Transport Co., Chhindwara v. The State of Madhya Pradesh, A.LR., 1952 Nagpur 363, Mallasattawa v. The Chairman, Regiona1l Transport Authority, Bangalore, A.LR., 1959, Mysore 114, disapproved.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 243 of 1965.

Appeal by special leave from the judgment and order dated January 13, 1965 of the Madhya Pradesh High Court in Misc.

Petition No. 624 of 1964.

S. V. Gupte, Solicitor-General, and 1. N. Shroff, for the appellant.

A. G. Ratnaparkhi, for the respondent No. 3.

The Judgment of the Court was delivered by

Ramaswami, J. This appeal raises an important question as to the scope and interpretation of s. 62(c) of the Motor Vehicles F Act and as to whether the appellant-The Madhya Pradesh State Road Transport Corporation-was entitle:l, in the circumstances of the case, to the grant of a temporary perm't for 4 months under s. 62(c) of the Motor Vehicles Act.

' On November 27, 1962 applications were invited for a permit for running a town bus service in Raipur. On February 20, 1963 it was decided by the Regional Transport Authority to grant a permit Jor the service to the 3rd resP.ondent-Madhya Pradesh Transport Co. (Pvt.) Ltd\,. Raipu; r-but the 3rd respondent did not produce buses of the required specifications for operating the service though several opportunities were given. The order granting the permit to the 3rd respondent was consequently revoked by the Regional Transport Authority on September 13, 1964. Shortly thereafter the Regional Transport Authority granted a temporary permit to the appellant for a period of two months i.e. from September 29, to November 28, 1964 in respect of the aforesaid bu11 service. By the order dated November 25, 1964 the Regional Transport Authority granted, another temporary permit for 4 months to the .appellant. The order of November 25, 1964 states:

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"From the large number of letters from some responsible members of the public received with this application and the statistics of the traffic catered to by the buses operated by the Corporation, it is now clear that the public of Raipur is feeling the .need of the town bus operations.

It Iias been decided by this Authority separately that applications for regular operations on two routes actually operated temporarily with some extensions a.nd one additional route be invited. However, it has to be accepted that expectations of the public for these transport facilities at least on the existing two routes have been aroused and have created a particular need which has to be met temporarily till regular operations are introduced.

The restrictions put by the first proviso to s. 62 of the Motor Vehicles Act and which has been emphasized in the decision of their Lordships of the M.P. High Court in Shri Ram Khanna v. Ramgopal Satyanarain '(1961 M.P.L.J. notes 121) will not operate in sanctioning a further grant for a period of four months till nearly tl1e end of March when the academic year may end for a large number of students availing of this facility.

A iem]:iJtary permit for a period of fout months from the date of ex¢ry, i.e., 28-11-1964, on the routes and timings covered by the previous order of grant dated 19-9-1964 is approved. This will stand cancelled if regular operations covering these routes are introduced in the meantime."

The 3rd respondent thereupon moved the High Court of Madhya Pradesh on December 19, 1.964 for grant of a writ of certiorari to F quash the order of the Regional Transport Authority granting temporary permits to the appellant for operating the bus servii:e.

The application was allowed by the High Court on January 13, 1965 and a writ in the nature of certiorari was issued quashing the order of the Regional Transport Authority dated November 25, 1964 by which a temporary permit was granted to the appellant.

G The High Court took the view that a temporary permit cannot be granted for any route when there is a permanent need for providing transport facilities on that route and it has been decided to invite applications for that purpose. This appeal is brought, by special leave, by the Madhya Pradesh State Road Transport Cor- R

oration against the judgment of the High Court in th<; writ {'etiuon.

Section 62 of the Motor Vehicles Act states:

"62. A Regional Tralllport Authority may without following the procedure laid down in section 57, grant permits, to be effective for a limited period not in any case,

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to exceed four months, to authorise the use of a transport vehicle temporarily-

(a) for the conveyance of passengers on special cca sion such as to and from fairs and religious gatherings, or

(bl for the purposes of a seasonal business, or

(c) to meet a particular temporary need, or

(d) pending decision on an application for the renewal of a permit; and may attach to any such permit any condition it thinks fit: Provided that a temporary permit under this section shall, in no case, be granted in respect of any route or area specified in an application for the grant of a new permit under section 46 or section 54 during the pendency of the application:

Provided further that a temporary permit under this section shall. in no case, be granted more than once in respect of any route or area specified in an application for the renewal of a permit during the pendency of such. application for renewal."

On behalf of the appellant it was contended, in the first pface, that there was a particular temporary need for the provision of transport facilities and the High Court was erroneous in taking the view that whenever there was a permanent need there could be no temporary need, and so temporary permit could not be granted' under s. 62(c) of the Motor Vehicles Act. In our opinion, the argument put forward by the learned Solicitor-General on behalf of the appellant is well-founded and must be accepted as correct.

It appears from the order of the Regional Transport Authority G that after the regular permit granted to respondent No. 3 was cancelled there was a shortage of necessary number of transport vehicles on the route and the Regional Transport Authority thought it fit to provide for this temporary need until regular operations were introduced and regular permits were granted after following the procedure prescribed under s. 57 of the Motor Vehicles Act. Section

H 62(c) of the Motor Vehicles Act states that the Regionat Transport Authority may grant a temporary permit "to meet a particular temporary' need" and we see no reason why this clause should be given any special or restricted meaning. There is no antithesis between a particular temporary need and a perma. nent need and it is manifest that these two kinds of need may coexist on a particular route. If, therefore, the Regional Transport Authority considered that, in the circumstances of the case, there

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was a particular temporary need, and granted a temporary permit A to the api>ellant, the action of the 'Regional Transport Authority cannot be challenged as legally invalid. Reference may be made, in this connection, to s. 62(d) which contemplates that temporal)"

permits may be granted to authorise the use of a transport vehicle temporarily pending decision on an application for the renewal of a permit. This sub-section, therefore, contemplates that there may B exist a temporary need for transport facilities on a particular route even in case of permanent need for such facilities. We are accordingly of opinion that the Regional Transport Authority was right as a matter of law in granting a temporary permit to the appellant under s. \62(c) of the Motor Vehicles Act in the circumstances of C . this case and the view expressed by the High Court is not correct.

It was also contended on behalf of respondent No. 3 by Mr.

Ratnaparkhi that, in any event, the Regional Transport Authority ought not to have granted a temporary permit for a total period exceeding the limit of 4 months. Learned Counsel placed reliance D on the words "in any case" appearing in s. 62 of the Motor Vehicles Act which has already been quoted. It was utged that the words "in any case" mean that under no circumstances a temporary permit can be granted on any route for more than a total period of 4 months. We are of opinion that the words "in any case" do not mean "in any circumstance". The section means that E at any one time the Regional Transport Authority is not permitted to issue to any person a temporary permit for a period exceeding 4 months, but if the temporary need persists, as, for example, where the formalities under s. 57 are not completed \\'.ithin a period of 4 months, it would, in our opinion, be permissible for the Regional Transport Authority to grant a second temporary permit in order p to meet the temporary need. We should, of course, make it clear that the Regional Transport Authordfy cannot abuse its power and go on granting temporary permits In quick succession and not take speedy action for completing the procedure under s. 57 of the Motor Vehicles Act. If upon the facts of any particular case it appears that the Regional Transport Authority is so abusing its G powers its action is liable to be corrected by grant of a writ, but where such abuse of power is not alleged or shown the mere fact that .the Regional Transport Authority has granted a temporary permit for a second time and the total duration of the two periods is more than 4 months, would not invalidate the second permit.

We accordingly reject the argument of learned Counsel for res- H pondent No. 3 on this point.

With regard to the construction of s. 62(c) of the Motor Vehicles Act there is divergencil of opinion among the various High Courts. In Jairam Dass v. Regional Transport Authority(')

(1) I.L.R. rl956JRajasthan 1053,

A it was held by the Rajasthan High Court that in a case where the Regional Transport Authority was of the view that the existing regular bus service was not sufficient to meet the traffic and decided to increase the number of regular buses plying on the route, it had the power to grant a temporary permit till the necessary formalities for increasmg the regular permits were B gone through and that thill would amount to a temporary need.

The same view has been taken by the Assam High Court in C handi

Prasad Mahajan v. The Regional Transport Authority, Gauhati(') in which it was said that s. 62{c) of the Motor Vehicles Act is quite general in terms and is not restricted to an existing particular need but includes a particular temporary need created by the inability of government or an individual to provide transport immediately. A contrary view has been expressed by Madras High Court in Sri Rama Vilas Service Ltd. v. The Road Traffic Board, Madl'as,(') by Kerala High Court in Balagangadhamn v. Regional Tmnsport Board, Quilon,(') by Nagpur High Court in Shah Transport Co., Chhindwara v. The State of Madhya Pradesh,(') and by Mysore High Court in Mallasattappa v. The Chairman, Regional Transport Authority, Bangalore.(')

For the reasons already expressed, we hold that the view taken by the Rajasthan High Court in Jairam Dass v. Regional Transport Authority(') and the Assam High Court in Chandi Prasad Mahajan v. The Regional Transport Authority, Gauhati(') as to the interpretation and the effect of s. 62(c) of the Motor Vehicles Act is correct.

It was submitted on behalf of respondent No. 3 that the order of the Regional Transport Authority dated November 25, 1964 had already expired and the Regional Transport Authority had invited fresh applications for permanent permit by Gazette notification dated December 14, 1964. It was contended by Mr. Ratnaparkhi that any declaration that this Court may make with regard to the grant of temporary permit dated November 25, 1964 would be academic. But the Solicitor-General submitted on behalf of the appellant that it was necessary for this Court to declare the true position in law, so that in consideration of fresh applications for a temporary permit in future no mistake may be made. The view taken by the High Court in the judgment under appeal would bind the Keg10nal Transport Authorities in the State unless it is set aside. We agree with the contention of Solicitor-General and con- H sider that, in the circumstances of this case, the question is not totally academic.

(') I.L.R. [1952] A.,.am 9. (') A.LR. 1948 Madras 400.

13) A.I.R. 1958 Kera.la 144.

( 4) A.I.R. 1952 Nagpur 353.

( 6) A.1.R. 1959 Mysore 114. (') I.L.R. [1956] R&jastban 1053.

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We accordingly allow this app.eai and set aside the order A passed by the High Court dated January 13, 1965 and declare that the order of the Regional Transport Authority dated November 25, 1964 granting a temporary permit to the appellant is legally valid. There will be no order with regard to costs of this appeal.

Appeal allowed.

THE REGIONAL TRANSPORT AUTHORITY, RAIPUR

1965 IP. B. GAJENDRAGADKAR

K. N. WANCHOO

M. HIDAYATULLAH

V. RAMASWAMI, JJ.

Motor Vehicles Act

s. 62

s. 62

s. 62

s. 62(c)

s. 62(c)

s. 57

s. 62

CIVIL APPELLATE JURISDICTION

S. V. Gupte

N. Shroff

A. G. Ratnaparkhi

Ramaswami

s. 62(c)

s. 62(c)

Motor Vehicles Act

November 27, 1962

Raipur

February 20, 1963

November 25, 1964

s. 62

Motor Vehicles Act

M.P. High Court

High Court of Madhya Pradesh

December 19, 1.964

January 13, 1965

Section 62

Motor Vehicles Act

section 57

section 46

section 54

s. 62(c)

Motor Vehicles Act

s. 57

Motor Vehicles Act

Motor Vehicles Act

s. 62(d)

Motor Vehicles Act

Ratnaparkhi

s. 62

Motor Vehicles Act

s. 57

s. 57

Motor Vehicles Act

s. 62(c)

Motor Vehicles Act

Rajasthan High Court

Assam High Court

s. 62

Motor Vehicles Act

Madras High Court

Mysore High Court

s. 62(c)

Motor Vehicles Act

December 14, 1964

A.I.R. 1958 Kera.la