LIFE INSURANCE CORPORATION OF INDIA A

CROWN

CO.

March 26, 1965 [K. N. WANCHOO, J. R. MuDHOLKAR AND S. M. SIKRI, JJ.J

Life Insurance Corporation Act (31 of 1956), First Schedule, Pa.rt B, Para 4, cl. (d) and Insurance Act (4 of 1938), s. 10(2)-"Life insnr- B ance fund". Meaning of.

Under s. 10(2) of the Insurance Act, 1938, where an carries on the business of life insurance, all receipts due in respect of su.ch business shall be carried to and form a separate fund called the life insurance fund. Section 11 ( c) provides for keeping a revenue account in Form D of the Third Schedule, which applies to life insurance business also. This account, on the receipt side, has rnainly income C from premiums and out of investments from life fund and, on the expenditure side, all expenses and bad debts connected with the life business. A balance is struck after taking into account the balance of the fund at the beginning of the year and after making some adjuotrnents and transfers, and the "life insurance fund". is arrived at.

Form I of the Fourth Schedule to the Insurance Act, provides for determining the surplus or deficit, which is the difference between D the net liability in business determined by actuarial valuation of policies in force and the Life Insurance Fund,. If there is a surplus, s. 49(1) of the Insurance Act provides, that 7!% of the surplus shall

be allocated to shareholders. and the balance shall remain in the fund for policv holders. When transfer of life insurance business from

the life insurance companies to the Life Insurance Corporation took place, a provision had to be made for carrying out the effect of s.49(1).

E That provision was made in Cl. (d) of para. 4 of Part B of the First Schedule to the Life Insurance Corporation Act, 1956, according to

which, where there is surplus in the life insurance fund, as a result

of the actuarial valuation of policy liabilities under Cl. (b) of the same para. 4, 96% of such surplus shall be shown as a liability, that is, 96% of that surplus shall go to the Corporation in order to meet the liabilities, and to that extent the compensation to be paid to the F' insurance company would he reduced. Part B applies to those insurers, who, having a surolus in Form 1 have not allocated the whole or any part of such sUrpl.us to policy holders, an<l also provides, how comnensation is to be paid to companies who had no surplus as disclosed in Form I. In the latter case, that is, if there was a deficit in Form T,. there could be no allocation to the policv holders under s.49(1) of the Insurance Act, and there would be no liability under Cl. (d).

On the taking over of 1 he business of the respondent, a life insu ranee company incorporated in Canada, by the appellants, under the Life Insurance Corporation Act, the respondent claimed Rs. 27 lacs and

odd as compensation. The respondent contended that the words "life insurance fund" in Cl. (d) referred to above had the same meaning' as those words in the Insurance Act, and since there was deficit in its working as shown by Form I. no amount was to be deducted as liab!- H lity under Cl. (d). The appellant was prepared to pay only Rs. 1 lac and odd, on the basis that, the words "life insurance fund" in Cl.

( d) meant the difference between the total assets and the liabilities

E •

L. I. c. v. CROWN INSURANCE (!f.anchoo, J.) 475

under Cls. (a) and (c) ancl since there was a surplus of Rs. 27 lacs and odd, a sum of Rs. 26 lacs and odd, forming, 96';{ of it, was to be clebited towards the liabilities of the respondent.

The Insurance Tribunal accepted the respondent's contention and awarded the compensation claimed by it.

In its appeal to this Court, the appellant contended that: (i) the words "life insurance fund" under the Insurance Act have more than one meaning under that Act, and therefore it was not pcssible to give the meaning, claimed by the respondent, to those words in Cl. (d) under the Corporation Act, and (ii) even if those words have only one meaning under the Insurance Act, they have a different

meaning under the Cl. (d).

HELD: (i) A combined reading of ss. 10(2), 11 and 13 of the Insu:ance Act and Form D cf the Third Schedule and Form I of the Fourth Schedule to the Insurance Act, shows, that the words "life insurance fund", ''surplus" and "dEficit'' have only the definite meaning set out above, as contended by the respondent. [ 480B-Cl

The contention, that the words ''life insurance fund" have different meanings in ss. 56(2) and 58(3), and in regulation 7 of Part I of the First Schedule to the Insurance Act, has no force, because when th 0 marginal note of s. 56(2) refers to surplus assets of life insurance fund it means in reality the surplus to be found in Form I and the same applies to s 58 (3): and as regards regulation 7, the plural is used in the words ''life insurance funds'' merely due to exigencies of gramma. r460F: 481D-E F-G] It cannot be said that because s. 27(1) of the Insurance Act lays down that an insurer is required to keep certain sums invested to m-:et his liabilities mention:d therein, the entire assets of the insurer are security for the policy holders and not merely the life insurance fund. This section only provides that when life insurance fund shows a deficit in Form I it w.ould be the duty of the insurer to see that he has further assets to cover the deficit, and that these assets are always kept invested in accordance with the Insurance Act; but ths section does not provide tpat the assets brought in to cover the deficit would

become part of the life insurance fund. It is only such moneys which are included in the revenue account, Form D, and which are not of a capital nature that form part of the life insurance fund. Since, in the instant c3se the business of the respondent in India had admittedlv shown a deficit in Form I, and the funds brought in by the respondent from outside to cover the deficit were never put in the revenue account, they were never made part of the life insurance fund, though

thev remained vested in a trustee under s. 27 (6) of the Insurance Act.

[482B-G]

(ii) The Tribunal was right in its conclusion that the words "life insurance fund" as used in Cl. (d_) of the aforesaid fourth paragraph have the same meamng as that given to them in s. 10(2) of the Insurance Act read with s. 11 and Form D of the Third Schedule to the Insurance Act. [483H]

When Cl. ( d) speaks of the life insurance fund being in surplus that sur!'lus has to be de.termmed m accord11nce with Form I subject to eertam mod1ficat10ns md1cated m Part B of the Corporation Act.

The cont

0 xt. therefore, mstead of showing that there is any other of the words "lif_e insurance fund" in Cl. (d), shows that they have the same meamng m that clause as in Form I. .[ 485D, El

Section 35(1) and (2) of the Corporation Act also point to the same_ conclusion. because, these provisions show that where the legislature in.tended to refer to all _Bssets and liabilities it said so in terms and did not use the words hfe msurance fund''. Resides, if these

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(1965) 3 S.C.R.

words were given the meaning for which the appellant. contended, A there would be an inconsistency between Cl. ( d) and s. 35, m th.at, the insurer would get away with a much larger amount if he app!Ied for repatriation of excess assets under s. 35, and would &et a much smaller amount if he did not choose to apply under the sect10n, a result which the legislature could not have intended. Moreover, the share capital of an insurance company cannot obviously form ptrt of the Me msurance fund; but on the interpretation urged on behalf of the appellant, even 96% of the share capital may be lost to an insurance company, as part of the life insurrnce fund in conce'vable circumstances.

[486A-C, F; 487G].

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 999 of 1964.

Appeal by special leave from the order dated March 25, 1964 of the Life Insurance Tr; bunal, Bombay in Case No. 27 of 1962.

C. K. Daphtary, Attorney-General, S. !. Banaji, Atiquor Rehman and K. L. Hathi, for the appellant.

N. A. Palkhivala, S. !. Sorabjee, J. B. Dadachanji, 0. C.

Mathur and Ravinder Narain, for the respondent.

The. Judgment of the Court was delivered by D

Wanchoo J. The only question that arises for determination in this appeal by special leave from the order of the Life Insurance Tribunal, Bombay, is the interpretation of the words "life insurance fund" as used in paragraph 4 of Part B of the First Schedule to the Life Insurance Corporation Act, No. 31 of 1956, (hereinafter referred to as the Act). The question arose in connection with the pay- E ment of compensation to the respondent, the Crown Life Insurance Company, which is incorporated in Canada,' by the appellant, the Life Insurance Corporation of India on the taking over of the business of the respondent by the appellant under the Act. The respandent claimed Rs. 27,86,658 as compensation while the appellant was prepared to pay Rs. 1,11,466. The respondent claimed that as F its life insurance fund was always in deficit before the Act came into force, there was no liability on it under cl.(d) of paragraph 4 of Part B of the First Schedule to the Act. The appellant on the other hand claimed that under that cl. (d), there was a surplus of Rs. 27,86,658 and therefore under cl. (d) a sum of Rs. 26,75,192 was to be debited towards the liabil'ties of the respondent. That is G how the appellant arrived at the compensation of Rs. l,11,466.

The appellant claimed that the words "life insurance fund" in

cl. (d:) meant the difference between the total assets and the liabilities under els. (a) and (c) of the said paragraph 4. The respondent on the other hand contended that the words "life insurance fund" in cl. (d) had the same meaning as those words had under the Insurance Act, No. 4 of 1938 (hereinafter referred to as the Insurance Act). The respondent therefore claimed that as there was always a

deficit in its working as shown by form I of the Fourth Schedule

to the Insurance Act, no amount was to be deducted as liability under cl. (d) of the said paragraph 4. It is this difference in the meaning assigned to the words "life insurance fund" by the parties

H I

L. I. c. v. CROWN INSURANCFJ (Wanchoo, J.) H7

that is responsible for the large difference in the amount claimed by the respondent and offered by the appellant.

The Insurance Tribunal has accepted the contention put forward on behalf of the respondent and has held that the words "life insurance fund" in cl. (d) of the said paragraph 4 have the same meaning as in the Insurance Act, and that there only one meaning of these words in the Insurance Act. It has rejected the contention raised on behalf of the appellant and has in consequence award• ed compensation at Rs. 27,86,658. Aggrieved by this order, the appellant got special leave from this Court; and that is how the matter has come up before us.

The sole question that falls for determination therefore depends on the interpretation of the words "life insurance fund" and for that purpose we shall have to consider certain provisions of the Insurance Act as well as of the Act. We may at the outset refer to s. 2 (10) of the Act, which is as follows: -

"In this Act, unless context otherwise require--

(10) all other words and expression used herein but not defined and defined in the Insurance Act shall have the meanings respectively assigned to them in that Act." It is .not in dispute that the words "life insmance fund" appear in the Insurance Act though not in the definition section thereof. Sec E tion 2 (I 0) of the Act however does not refer only to the definitions

in the definition section of the Insurance Act; it lays down generally that any words and expressions used in the Act and defined

in the Insurance Act shall have the meanings assigned to them in the Insurance Act (and that means anywhere in the Insurance Act) unless the context otherwise requires. We have therefore to turn to F the Insurance Act first to find out the meaning of .the words "life insurance fund" as given therein and then to see whether the context of cl. (d) of the said paragraph 4 requires otherwise. If we come to the conclusion that it does not require otherwise, the words "life insurance .fund" in cl. (d) of the said paragraph 4 will have the same meaning as in •he Insurance Act.

G Let us therefore turn to the Insurance Act to see what the words "life insurance fund" mean under that Act. It has been urged in the first place on behalf of the appellant that the words "life insurance fund" un.de.r the Insu; ance have not one meaning only and therefore 1t 1s not possible to give that meaning to these H words in cl. (d) with which we are concerned. In the alternative it is urged that the context requires that even if the words "lift insurance fund" have only one meaning under the fosurance Act they have a different meaning under cl. (d). '

We have therefore to find out what the words "life insurance fund" mean under the Insurance Act and whether they have the same meaning throughout the Act. We have already pointed out that the words "life insurance fund" have not been defined in s. z L/P(N)l8Cf-4

[1965) 3 8.C, B.

of the Insurance Act, which is the definition section. But there is no A doubt that in s. 10 of the Insurance Act, these words have been given a specific meaning to which we shall now refer. The Insurance Act was not only with life insurance business but also with insurance business of other kinds, namely, marine, fire and miscellaneous. It was open to an insurance company to carry on

either the life insurance business only or life insurance business B along with insurance business of other kinds also. Therefore, s. IC(]) of the Insurance Act provided that where an insurer carried on business of more than one kind, he was bound to keep a weparate account of-all receipts and payments in respect cf each kind of business. Section 10(2) dealt specifically with life insurance and we therefore read the relevant part of that .sub-section: - c

"Where the insurer carries on the business of life insurance, all receipts due in respect of such business shall be carried to and shall form a separate fund to be called the life insurance fund the assets of which shall ...... be kept distinct and separate from all 0th.er assets of the insurer and the deposit made by the insurer in respect 0f life insurance business shall be deemed to be part of the assets of such fund and every insurer shall ...... furnish to the Controller a statement showing in detail such assets as at the close of every calendar year duly certified by an auditor or by a person qualified to audit under the law of the insurer's country'" There are three provisos to this section to which it is unnecessary for our purposes to refer. Sub-section (3) of s. I 0 is also material and runs as follow:-

"The life insurance fund shall be as absolutely the security of the life policy-holders as though it belonged to an insurer carrying on no other business than life insurance business and shall not be liable for any contracts of the insurer for which it would not have been liable had the business of the insurer been only that of life insurance and shall not be applied directly or indirectly for any purposes other than those of the life insurance business of the insurer."

Section 11 (c) then provides for keeping a revenue account in form D of the Third Schedule in respect of each insurance business for

which separate account was required to be kept under s. 10(1).

Regulation I of Part I of the Third Schedule provides that form D as set out in Part II is appropriate for life insurance business. A perusal of form D shows what items have to be entered on the

receipts side of the form and these items are: premiums of all kinds, consideration for annuities, interest, dividends and rents

(obviously from assets of the life insur!ince fund); regulation fees and other income. It is thus clear that the revenue account on the receipt side mainly has income from premiums and income arising

L. I. c. v. CROWN INSURANCE (Wanchoo, J.) 479

out of investments from life fund and this forms the main basis of the life insurance fund. On the expenditure side of form D there is provision for claims under pol'cies, annuities, surrenders, bonuses in cash, bonuses in reduction of premiums, expenses of. management (i.e. salaries etc., travelling expenses, directors' fees, auditors' fees, and charges for advertisements, printing and stat'onery, other expenses of management, rents for office belonging to and occupied

by the insurer, rent of other offices kept by the insurer), bad debu and other expenditure. Thereafter a balance has to be struck and this balance is the balance of the life insurance fund. This balance is arrived at after taking into account the balance of the fund at the beginning of the year and after making adjustments with respect to profit and loss and transfers from appropriation account. It is this balance which goes into the balance skeet form A provided in the First Schedule of the Insurance Act as life insurance fund and in eludes as provided in s. 10(2) the deposit made by the insurer in respect of life insurance business. There is no doubt therefore that the words "life insurance fund" under the Insurance Act have got the meaning assigned to it under s. I 0(2) read with s. 11 and form D of the Th!rd Schedule. I.t is equally clear that all the assets of an insurance company doing life insurance business do not form part of the life insurance fund. for example, if the insurance company has got share capital that is not part of the life insurance fund even though the deposit required by law to be made for life insurance business is part of the fund. So far therefore as s. 10(2), s. 11 and form D are concerned, life insurance fund has a definite meaning.

The working of a life insurance company is in some respects different from that of ordinary companies inasmuch as it is not opeD to a life insurance company to distribute dividends unless there is surplus computed under the Insurance Act. This surplus is determined thus: First of all the life insurance fund as disclosed by revenue account in form D is found out. Then the valuation of the policies in force as on a certain date is determined by actuarial valuation which has to be made at least once in three years under s. 13(1) of the Insurance Act. After valuation of the policies of different kinds they_ are grouped under different heads and their summary is set flut m form H. of the Fourth Schedule. Form I of the said Schedule provides. for determining the surplus or deficit. This form is known as valuation balance sheet and the surplus or deficit is the differ e_nce. between net liability in business as shown in form H and the hfe fund as shown in sheet form A. Surplus will only _res_u_lt if the balance of hfe msurance fund is greater than the net hab1hty form H. Where however the balance of life insurance 1s less than the net liability under form H, there will be a deficiency and not surplus. Section 49(1) of the Insurance Act then provides that no amount of the life insurance fund wiH be used to pay any div; dend to share-holders or any bonus to policyholrlers or for making any payment in service of anv debenture unles' valuation balance sheet in form I of the Fourth Schedule

SUPREME COURT (1965] 3 s.c.n.

shows a surplus. It is further provided that out of the surplus only A Ti per centum shall be allocated to or reserved for shareholders with the consequence that the balance of 921 per centum of the surplus remains in the fund for policyholders or may be allocated as bonus to policyholders. The life insurance fund as defined in

' l0(2) is an absolute security of the life policy-holders and cannot be used in any manner except in accordance with the B provisions to which we have already referred, Thus the words "life insurance fund" have a definite meaning under the Insurance

Act under s. 10(2), read with s: 11 and form D of the Insurance Act and the words "surplus" and "deficiency" have also special meaning appearing from a combined reading of s. 13 of the Insurance Act and form H and form I of the Fourth Schedule.

 C

The next question is whether the words "life insurance fund" have any other meaning under the Insurance Act. These words appear in a number of provisions of that Act. It is not necessary however to refer to all of tl1ose provisions for it is not in dispute that in most of the provisions the words have the meaning assigned D to them under s. 10(2) of the Insurance Act. But three provisions have been specifically brought to our notice where it is said that the words have a different meaning. The first is s. 56 which deals with winding-up of insurance companies. In sub-section (2) thereof reference is made to surplus of assets over liabilities and how such surplus which is called prima facie in the sub-section is to E be dealt with. It will however be seen that the sub-section does not use the words "life insurance fund" when speaking of prima facie surplus which is the difference between all assets and all liabilities.

But it is urged that the marginal note to the section which is in these words "application of surplus assets of life insurance fund in liquidation or insolvency" shows that for the purpose of this sect; on, F the words "life insurance fund" as used in the marginal note may have a different meaning. We are however of opinion that this is not so. Sub-section (2) after speaking of prima facie surplus, which

is equa I to total assets minus total liabilities, provides how the prima facie surplus is to be dealt within winding-up proceedings.

The SJJb-section provides that this prima facie surplus would be G divided into two parts and one part would be in proportion to the profits of the insurer allocated to policy-holders. This part will naturally be determined with respect to form I of the Fourth Schedule which deals with life insurance fund and surplus or deficiency. The sub-section thus provides that out of the prima fade surplus a certain amount will be deducted in proportion to the profit allocated B to the policy-holders, and remaining will be the amount which may go to shareholders in winding-up. Therefore as we read sub-section

(2) we find that it deals with entire assets and these entire assets will certainly include the life insurance fund. The marginal note indicates how out of the prima facie indicated in sub-section

(2) the surplus in the life insurance furid as arrived at in (orm I shall be used. The argument that the words "life insurance fund" in

L. I. c. v. CROWN INSURANCE (JV an{; hoo, J.) 481

56(2) has a different meaning therefore has no force for two reas:rns. In the first place the section does not use the words "life insurance fund" and in the second place when the marginal note refers to surplus assets of life insurance fund it means in reality the surplus to be found: in form I, for the prima facie surplus will include that. We cannot therefore accept the contention that for the

purposes of s. 56(2) the words "life insurance fund" have a different meaning in view of the marginal note of s. 56.

The next section to which reference is made in this connection is s. 58(3). Section 58 deals with schemes for partial winding-up of insurance companies, i.e. winding-up of one kind of business while another kind of business goes on. Section 58(3) provides that the

provisions of this Act relating to valuation of liabilities of the insurer in liquidation and insolvency and to the application of surplus assets of the life insurance fund in liquidation or insolvency shall apply to the winding-up of any part of the affairs of the company. It is argued that the words "life insurance fund" here are used

in a different sense. We are of opinion that this is not so. Sub-section

(3) of s. 58 has to be read along with s. 56 and in particular with sub-s. 12) thereof and as we have already indicated the words "life

insurance fund" iri the marginal note of s. 56 have no different meaning from that to be found in s. 10(2) the same applies to the use of the words "life insurance fund" in .s. 58(3) mutatis mutandis.

Lastly reference was made to regulation 7 of Part I of the First Schedule, which provides for a certificate that no part of the assets of the life insurance fund has been directly or indirectly applied in contravention of the provisions of the Insurance Act relating to the application and investment of life insurance funds. It is urged that

the use of the plural suggests that a different meaning is to be given to the words "life insurance fund" here. We are unable to agree with this contention either, The use of the words "life insurance funds" in plural is merely due to the exigencies of grammar in this provision and does not mean that the words have a meaning different from that assigned to them in s. l 0(2) to which we have already referred. We must therefore reject the contention on behalf of the appellant that the words "life insurance fund" have any meaning other than that assigned to them in s. l 0(2) of the Insurance Act so far as that Act is concerned.

Reference is then made to s. 27(1) of the Insurance Act which requires that every insurer shall invest and at all times keep invested assets equivafent to not less than the sum of the amount of his to holders of life insurance policies in India on account of matured claims and the amount required to meet the liabilitv on policies of life insurance maturing for payment in India subjeet to certain deductiom;. It is urged that this provision lays down that an insurer is required to keep certain sums invested to meet his liabilities mentioned therein and this shows that the entire assets of the insurer are security for the policy-holllers. It is true that this provision requires an insurer to keep certain assets invested and those

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[1965] 3 S.C.R.

have to be equal to his liabilities on policies matured and policies A. yet to mature. This provision is for the protection of the policyholders' interest. It has however in our opinion nothing to do with the life insurance fund as such. What in fact it provides is that when the life insurance fund shows a deficit in form I it would be the duty of the insurer to see that he has further assets to cover the deficit, and that these assets are always kept invested in accordance B. with the Insurance Act; but the section does not provide that the assets brought in to cover the deficit would become part of the life insurance fund. It is not in dispute that there is no other provision in the Insurance Act which requires that whenever the life insurance fund is in deficit the insurer must put sufficient money in that fund itself to cover the deficit. It is true that form D of the Third Scb.ec dule includes an item "other income" but that does not mean that any sum kept invested by an insurer for the purposes of s. 27(1) in order to cover the deficit in the life insurance fund becomes part of that fund. Note (e) which appertains to "other income" of the 1aid form D makes it clear that all the amounts received by the insurer directly or indirectly whether from his head office or from D any other source outside India shall also be shown separately in the revenue account except such sums as properly appertain to the capital account. Therefore sums invested for purposes of s. 27(1) of the Insurance Act do not necessarily form part of tl)e life insurance fund. It is only such moneys which are included in form D and

which are not of capital nature that form part of the life insurance E fund. In the present case it is not in dispute that the business of the respondent in India always had shown a deficit in form I. It is also not in dispute that in order to meet that deficit as required by s. 27(1), the respondent took advantage of s. 27(6) which provides that the assets required by this section to be held invested by an insurer incorporated or domiciled outside India shall F subject to 'certain exceptions be held in India and all such assets shall be held in trust for the discharge 'of the liabilities of the nature referred to in sub-s. (!) and shall be vested in trustees resident in India and approved by the Central Government and the instrument of trust under this sub-section shall be executed by the insurer with the approval of the Central Government and shall . G define the manner in which alone the subject-matter of the trust shall be dealt with. Such an instrument of trust was executed by the respondent and the State Bank of India was the trustee of the fund required to be kept under s. 27(1) read with s. 27(6).

But that in our opinion did not make the whole of this trust fund part of the life insurance fund as defined in s. 10(2). The money H required to cover the deficit in form I could only become part of che life insurance fund if that was included in the revenue account form D and in such a case there would

then be no deficit left in the life insurance fund. It is not iti dispute that in this case funds brought in by the respondent from outside to cover the deficit were never put in the revenue account and were never made part of the life insurance fund, though

L. I. c. "· CROWN INSURAKCE (Wanclwo, J.) 483

they remained vestd in the trustee for the purpose of. s. 27(1) read withs. 27(6).

The appellant's contention always was that the case of the respondent, for purpose of compensation, was covered by part B of the First Schedule to the Act and not by its Part A, and this was because there was a deficit in form I submitted by the respondent throughout its working. It appears that in spite of this deficit in the Indian working of the respondent, the

respondent used to pay bonuses to its policy-holders out of its global surplus and these payments were made in cash. Even so the appellant insisted-and rightly-that as form I showed deficit at the relevant time the respondent was not entitled to take advantage of Part A of the First Schedule to the Act for purposes of compensation. In such circumstances it seems strange when admittedly there was always a deficit in form I submitted by the respondent in connection with its Indian business that the appellant should now say for the purpose of compensation that there is a surplus disclosed by the business of the respondent. 96 per centum of which would go to the appellant under cl. (d) of the aforesaid '4th paragraph. We are therefore of opinion that the appellant cannot take advantage of s. 27(1) and ask us to hold that all the funds which are mentioned in s. 27(1) to be kept invested are part of the life insurance fund. Part B applies to two kinds of insurance companies-viz.. those which had deficits and those which had surplus but had not distributed it at the relevant time. It is

the latter class of companies that cl. (d) is really meant to cover.

As we have already said s. 27(1) has nothing to do with the life insurance fund and is meant only as a safety device for policyholders, particularly in cases where there is deficit in the life insurance fund.

But where such deficit is made up for the purpose of s. 27(1), the extra amount so invested by the insurer to make up the deficit does not automatically become part of the life insurance fund unless it is put through the revenue account form D. That was admittedly never done in this case and form I always showed a deficit in the case of the respondent.

Section 27(1) therefore does not help the appellant, for it is not in dispute that an insurer is not bound to make up the deficit by putting money in the life iasurance fund though he is bound to keeo assets invested to make up the deficit; but such assets may be kept"outside the life insurance fund.

Now we come to the last question whether there is anything in the Act which requires that we should give a different meaning to the words "life insurance fund" in cl. (d) of the aforesaid 4th paragraph.

We have already referred to s. 2(10) of the Act which lays down that all other words and expressions used in the A:ct but

not defined and defined in the Insurance Act shall have the meanings respectively assigned to them in that Act. Prima facie, therefore, the words "life insurance fund" used in cl. (d) of the aforesaid 4th paragraph have the same meaning as in the Insurance Act, and the question is whether the context of the Act requires that we should give a different meaning to these words. We are of opinion

48{

(1965] 3 S.C.R•

that !here is nothing in the context of the Act which requires that a different meaning should be given to these words. If anything,

the Act shows that these words have the same meaning in cl. (d) of the aforesaid 4th paragraph as in the Insurance Act.

In the first place we have to see what is the reason for the provision in cl .. (d) of the aforesaid 4th paragraph. We have no doubt that the provision in cl. (d) is related to the provision in s. 49(1) of the Insurance Act. We have already referred to that

section and it requires that 92! % of the surplus in form I shall be kept for the policy-holders.

Where therefore there is surplus in form I. 92! per centum thereof is meant for the policy-holders under this provision. Secondly when transfer of life insurance

business from the life insurance companies to the Life Insurance Corporation took place a provision had to be made to carry out the effect of s. 49(1) in connection with the transfer. That provi-. sion is to be found in cl. (d).

It lays down that where there i! a surplus in the life insurance fund as a result of the actuarial

valuation of policy liabilities made under cl. (b) of the aforesaid paragraph 4, 96 per centum of such surplus shall be shown as a liability. This means that just as under s. 49(1), 92! per centum of the surplus in form I was meant for the policy-holders so in the case of transfer, 96 per centum or that surplus shall go to the

Life Insurance Corpora, ti on in order to meet . the liabilities arising under s. 49 (!) of the Insurance Act for past surplus and to that extent the compensation to be paid to the insurance company from which the Life Insurance Corporation was taking over business would have to be reduced. This was with reference to the past and could not be with reference to the future, for so far as the future was concerned, the Life Insurance Corporation alone was responsible.

But if there was a deficit in form I of the insurance company which was being taken over by the Life Insurance Corporation there could be no allocation to the policy-holders under s. 49(1) of the Insurance Act and there would be no liability for the past. So there would be no liability for the past under cl. (d) on the insurer whose business was being taken over by the Life Insurance Corporation. In the present case admittedly there was no surplus in form I in the case of the respondent and therefore ' there would be no liability on the respondent under cl. (d) of the

aforesaid 4th paragraph. This in our opinion is the rationale behind the provision in cl. (d) and as there was always a deficit in

connection with the working of the respondent, there could be no liability on the respondent under cl. (d).

But apart from this rationale behind cl. (d) we find that the language of Part A and Part B of the First Schedule relating to principles for determining compensation also leads to the same inference. Part A provides that compensation to be given to an insurer having a share capital on which dividend or bonus is payable who has allocated as bonm1 to policy-holders the whole or any

part of the surplus as disclosed in the abstracts prepared in accordance with Part II of the Fourth Schedule to the Insurance Act in

L. r. c.

CROWN INSURANCE (Wanchoo, J.) 485

respect of the last actuarial investigation relating to his controlled business as at a date earlier than January l, 1955 shall be computed under that part. Clearly therefore this provision in Part A refers to surplus to be found by looking at fonn I of the Fourth Schedule to the Insurance Act. Part B of the First Schedule to the Act then speaks of compensation to be given to an insurer having a share capital on which dividend or bonus is payable but who has not made any such allocation as is referred to in Part A. This immediately brings in the opening words of Part A and shows that Part

B applies also to those insurers who having a surplus in form I have not allocated the whole or any part of such surplus to policyholders. The surplus in form I is arrived at as already indicated when the life insurance fund is larger than the liabilities on the policies still to mature. Clearly, Part B provides how compensation is to be paid to companies who had no surplus as disclosed in form I of the Fourth Schedule to the Insurance Act or who if they had any surplus in that form had made no allocation to policy-holders. Therefore when cl. (d) of the aforesaid 4th paragraph speaks of the life insurance fund being in surplus that surplus has to be determined in accordance with form I of the Fourth Schedule to the Insurance Act subject to modifications indicated in

Part B in the matter of valuation under form H and not in the manner suggested on behalf of the appellant. The word "surplus" in cl. (d) cannot have a meaning different from what it has in the opening words of Part B which come therein from Part A. The context therefore instead of showing that there is any other meaning of the words "life insurance fund" in cl. (d) shows that they have the same meaning in that clause as in form I of the Fourth Schedule to the Insurance Act.

Another reason which points to the same conclusion, namely, that the words "life insurance fund" in cl. (d) have the same meaning as in form I of the Fourth Schedule to the Insurance Act, is to be found in s. 35(1) and (2) of the Act. Section 35(1) permits a foreign insurer to repatriate certain assets. It says that an insurer incorporated outside India may, before the appointed day, make an application to the Central Government stating that among the assets appertaining to the controlled business of the insurer there are assets brought into India by him for the purpose of building up his life insurance business in India which should not be transferred to and vested in the Life Insurance Corporation. On receipt of such an application, the Central Government has to determine the value of the assets of the insurer appertaining to his controlled business in existence on December 31, 1955 in accordance with the provisions contained in paragraph 3 of Part B of the First Schedule to the Act and deduct therefrom the total amount of the liabilities of the insurer appertaining to his controlled business as on December 31, 1955 computed in accordance with the provisions contained in the Second Schedule to the Act; and if there is any excess, the Central Government may direct that such assets equivalent in valne to the excess shall not be transferred to or vested in

i86 SUPREME Cj)URT .RRPORTS

(1965] 3 8.C.R,

the Life Insurance Corporation. It is obvious from these provi- A sions that where the legislature intended to refer to all the assets and liabilities it said so in terms and did not use the words "life insurance fund".

The use of the words "life insurance fund" in

cl. (d) of the aforesaid 4th paragraph therehre must have the special significance assigned to these words in <he Insurance Act and cannot be equated to the difference between the total assets B and liabilities apart from liabilities towards policies yet to mature.

Besides we are of opinion that if the words "life insurance fund" in cl. (d) are to be given the meaning for which the appellant is contending there will be a clear inconsistency between cl. (d) and

35 of the Act. Section 35 permits a foreign insurer to take away what may be called excess assets but a foreign insurer is not bound 0 to make an application under s. 35.

Now take the case of the reapondeut.

It is not in dispute that the respondent has taken away excess assets with the permission of the Central Government

under s. 35, to the tune of about rupees fifteen or sixteen lakhs. 3ut if the respondent had not chosen to make the application under

i. 35, all his assets would have to be considered under Part B Drclating to compensation. It that was so. according to the contention put forward on behalf of the appellant as to the meaning of the words "life insurance fund", the total compensation under Part B of the First Schedule to which the respondent would have been entitled, would be Rs. 1,74,408. This means that as by making an application the respondent was able to take away B Rs. 15,73,540 under s. 35(2) he would further get Rs. 1, ll,466 as compensation under Part B of the First Schedule to the Act. But

il he had not made the application under s. 35, he would only get Rs. "t,74,408 in all. There is no doubt that the legislature could not have intended such a result, namely, that the insurer should get away with a much larger amount if he applies under s. 35 and F should get a much smaller amount if he does not choose to apply

under s. 35.

On the other .hand, if we accept the contention of the respondent as to the meaning of the words "life insurance fund" it would make no difference to the compensation whether the insurer applies under s. 35 or not.

We must hold that the legislature intended that in either case an insurer would get the same G amount whether it comes to him as compensation in one sum or comes to him as compensation plus repatriation of excess assets. lf the words "life insurance fund" are interpreted to mean what the respondent says, t.he result would be this. If it applies for repatriation it would get Rs. 15,73,540 as repatriation of excess assets and Rs. 27,86,658 as compensation under Part B: total H Rs. 43,60,198. If it does 'not apply for repatriation and if cl. (d) has the meaning urged on behalf of the respondent, its total compensation would come to the same figure, namely, Rs. 43,60,198.

This clearly shows that the legislature intended the words "life insurance fund" to mean what they meant in s. I 0(2) for that would give in our opinion the same result whether an insurer applied under s. 35 or not.

L. l. ('. V. CRU\'i'.\' 1N;.iUJ\.ANCI; ( Jlf.a.ttcl,(, J, J .) 187

We have already said that cl. (d) provides for past surplus in form [, the responsibility for which passes on to the Life Insurance Corporation when it takes over the life business of an insurer.

So fiir as the future is concerned, cl. (b) of the aforesaid 4th paragraph provides for a higher valuation for with-profits policies with

the result that the liability which the insurer whose business is being taken over has to bear with respect to with-profits policies is higher. The appellant apparently claimed an amount under cl.

(d) on the ground that at future valuation the bonus payable to the policy-holders would be reduced.

Now cl. (d) in our opinion provides for cases where there have been surpluses in the past while the provision for the future in respect of profit policies is to be found in cl. (b).

The appellant therefore cannot lay claim to anything under cl. (d) unless there were surpluses in the past in form I of the Fourth Schedule to the Insurance Act. The contention that the appellant is likely to suffer if the meaning contended for by the respondent is given to the words "life insurance fund",

particularly with respect to with-profit policies has in the circumstances no force, for there is already a weightage in favour of calculating liability for with-profit policies under cl. (b) of the 4tt

paragraph of Part B of the First Schedule to the Act.

Lastly there will be another curious result if the words "life insurance fund" in cl. (d) is given the meaning contended for on behalf of the appellant. Take the case of an Indian company which has shares but which has always been showing deficit in form I of the Fourth Schedule to the Insurance Act. If life insurance fund for the purposes of cl. (d) is calculated in the manner contended for on behalf of the appellant the result would be that the share capital of such a company would also come into the assets and if as a result of the share capital going into assets the deficit in form I is converted into surplus such a company would in conceivable circumstances lose 96 per centum of its share capital as if it was part of the life insurance fund. It is obvious that the share capital of an insurance company cannot be a part of the life

insurance fund; but on the interpretation urged on behalf of the appellant even 96 of the share capital may be lost to an insurance company, whose business is being taken over by the Life Insurance Corpc, ration if the words "life insurance fund" are given the wide

meaning for which the appellant is contending. We have therefore no doubt that the tribunal was right in its conclusion that the words "life insurance fund" as used in cl. (d) of the aforesaid 4th

have the same meaning as that given to them in s. I 0(2) of the Insurance Act read with s. 11 and form D of the Third Schedule to the Insurance Act.

In this view of the matter the appeal must fail. '

We therefore dismiss the appeal with costs to the respondent.

The ; espondent will be at liberty to withdraw the money deposited

in tl11s Court towards compensation.

Appeal dismissed.

LIFE INSURANCE CORPORATION OF INDIA

March 26, 1965

K. N. WANCHOO, J.

R. MuDHOLKAR

S. M. SIKRI, JJ

Life Insurance Corporation Act

First Schedule

Insurance Act

s. 10(2)

s. 10(2)

Insurance Act, 1938

Section 11

Third Schedule

s. 49(1)

Insurance Act

Life Insurance Corporation

Insurance Act

Canada

Life Insurance Corporation Act

Insurance Act

Insurance Act

Insurance Act

ss. 10(2), 11 and 13

ss. 56(2) and 58(3)

s. 56(2)

s 58

s. 27(1)

Insurance Act

Insurance Act

India

s. 27

Insurance Act

s. 10(2)

Insurance Act

s. 11

Part B of the Corporation Act

Section 35(1)

s. 35

s. 35

C. K. Daphtary

S. !. Banaji

Atiquor Rehman

K. L. Hathi

N. A. Palkhivala

S. !. Sorabjee

B. Dadachanji

C.

Mathur

Ravinder Narain

D

Wanchoo

Crown Life Insurance Co

Life Insurance Corporation of India

Part B of the First Schedule to the Act

Insurance Act

Insurance Act

Fourth Schedule

Insurance Act

Wanchoo

Insurance Act

Insurance Act

Insurance Act

s. 2

Insurance Act

Insurance Act

Insurance Act

Insurance Act

Insurance Act

Insurance Act

Insurance Act

Insurance Act

Insurance Act

s. 10

Insurance Act

Insurance Act

Insurance Act

Section 10(2)

Section 11

Third Schedule

s. 10(1)

Third Schedule

First Schedule

Insurance Act

s. 10(2)

Insurance Act

s. 11

s. 10(2)

s. 11

Insurance Act

s. 13(1)

Insurance Act

Fourth Schedule

Section 49(1)

Insurance Act

Fourth Schedule

SUPREME COURT (1965] 3 s.c.n

s. 10(2)

Insurance Act

s. 13

Insurance Act

Fourth Schedule

Insurance Act

s. 10(2)

Insurance Act

s. 56

Fourth Schedule

s. 56(2)

s. 56

s. 58(3)

Section 58

Section 58(3)

s. 58

s. 56

s. 12

s. 56

s. 10(2)

s. 58(3)

First Schedule

Insurance Act

Insurance Act

s. 27(1)

Insurance Act

Insurance Act

Insurance Act

s. 27(1)

s. 27(1)

Insurance Act

s. 27(1)

s. 27(6)

Central Government

State Bank of India

s. 27(1)

s. 27(6)

s. 10(2)

Wanclwo

s. 27(1)

First Schedule

First Schedule

s. 27(1)

s. 27(1)

s. 27(1)

s. 27(1)

Section 27(1)

s. 2(10)

Insurance Act

Insurance Act

Insurance Act

s. 49(1)

Insurance Act

s. 49(1)

s. 49(1), 92

s. 49

Insurance Act

s. 49(1)

Insurance Act

First Schedule

Insurance Act

Part B of the First Schedule to the Act

Insurance Act

Fourth Schedule

Insurance Act

Fourth Schedule

Insurance Act

Fourth Schedule

Insurance Act

s. 35(1)

Section 35(1)

December 31, 1955

Part B of the First Schedule to the Act

Second Schedule

Insurance Act

Section 35

s. 35

s. 35

First Schedule

s. 35(2)

Part B of the First Schedule to the Act

s. 35

s. 35

s. 35

s. 35

s. 35

Fourth Schedule

Insurance Act

Part B of the First Schedule to the Act

Insurance Act

Insurance Act

s. 11

Third Schedule

Insurance Act


AJOY KUMAR MUKHERJEE

LOCAL BOARD OF BARPETA

February, 11, 1965

IP. B. GAJENDRAGADKAR, C.J., K. N. WANCHOO, M. HIDAYATULLAH,

J. C. SlrAH AND S. M. SIKRI JJ ]

Assam Local Self Governmemt Act 1953, (Act 25 of 1953), s. 62- Tax-Whether on land used for market or on market-State leaillature, competence-Constitution of India Seventh Schedule, List II

Entry 49-Interpretation-Discrimination-Allegations-Burden of prJOJ.

The appellant as a lund-holder held a hat or market on his land.

The respondent, the local board, within whose jurisdiction the market was held, issued notice to the appel!lant to take out 'I licence and pay a certain suni as licence fee for holding the market. Inspite of the continued protests of the appellant against the levy, the amount was sought to be recovered by the issue of distres! warrants and attachment of his property. The appellant filed a writ petition in the High Court challenging on a number of grounds, the constitutionality of the impost, which was dismissed. In appeal by certificate the appellant contended that (i) the Assam Legislature had no legislative competence to tax markets, and (ii) the tax actually imposed on this market infringed Art. 14 of the Constitution, because the Loard fixed a higher rate for the appellant's market as compared with other neighbouring markets. ·

HELD: (i) The tax in the present case being on land within the meaning of Entry 49 .of List II of the Seventh Schedule of the Constitution, would clearly be within the competence of the State Legislature. r 49 E-Cl

The Scheme of s. 62 of the Assam Local Self Government Act, 1953 shows that the tax provided therein is a tax on land, though its incidence depends upon the use of the land as a market and the owner, occupier or farmer of that land has to pay a certain tax for

its use as such. But there is no tax on the transaction that may take

plar~ within the market. Further the amount of tax depends upon the area of the land on which the market is held and the importance of the market subject to a maximum fixed by the State Government.

Sectic n 62(2) which used the words "impose an annual tax thereon" clearly shows that the word "thereon" refers to any land for which a licence is issued for use as a market and not to the word "market".

The use to which the land is put can be taken into .account in imposing a tax on it within the meaning of entry 49 of thtl'List II. Ral!a Ram

v. The Province of East Punjab, P9481 F.C.R. 207, applied. [51 C-F]

(ii) It was for the appellant to show that in fixing the tax 0.11. the other markets as it did, the board acted arbitrarily and did not take into account 'the size and importance of the markets. As there was no material by which the relative size and imoortance of those markets, could be judged. it was not possible to hold that there was discrimination in taxing this market. r52 F-Gl

CIVIL APPELLATE JURISDfCTION: Civil Appeal No. 630 of 1963.

Appeal from the judgment and order dated June 8, 1959 of A the Assam High Court in Civil Rule No. 42 of 1957.

D. N. Mukherjee, for the appellant.

Naunit Lal, for the respondent No. 3.

The Judgment of the Court was delivered by Wanchoo, J. This appeal on a certificate granted by the Assam B High Court raises the question of the constitutionality of an annual tax levied by local boards for the use of any land for the purpose of holding markets as provided by s. 62 of the Assam Local Self-Government Act, No. XXV cf 1953, (hereinafter ceferred to as the Act). Th~ ap.pellant is a landholder in the district of Kamrup. As such landholder, he holds a hat or market on his C land since the year 1936 and this market is known as Kharma hat.

Jn 1953-54, the local board of Barpeta, within whose jurisdiction the Kharma market is held, issued notice to the appellant to take out a licence and pay Rs. 600/- for the year 1953-54 as licence-fee for holding the market. Later this sum was increased to Rs. 700 f - for the year 1955-56. The appellant continued ;>rotesting against D this levy but no heed was paid to his protests and the amount was sought to be recovered by issue of distress warrants and attachment of his property. Consequently, the appellant filed a writ petition in the High Court challenging the constitutionality of the impost on a number of grounds. In the present appeal two main con-

J!! tentions have been urged in support of the appellant's case that the impost is unconstitutional, namely, (i) that the Assam legislature had no legislative competence to tax markets, and (ii) that the tax actually imposed on the Kharma market infringes Art. 14 of the Constiiution. We shall therefore consider these two contentions only. r This attack on behalf of the appellant is met by the respondent by relying on. item 49 of List II of the Seventh Schedule to the Constitution, and it is urged that the State legislature was competent to impose the tax under that entry, for this was a tax on land.

As to Art. 14, the reply on behalf of the respondent is that under s. 62 of the Act, a rule has been framed prescribing Rs. 1000 I - as & the maximum amount of tax which may be levied by any local toard in Assam on markets licensed under that section. The rule also provides that any locai board may with the previous approval of Government impose a tax within this maximum according to the size and importance of a market. So it is submitted that the tax has been imposed by Barpeta local board in accordance with K this rule, and the appellant has failed to show that there has been any discrimination in the fixation of the amount of tax on the Kharma market.

The High Court repelled the contentions raised on behalf of the appellant and dismissed the writ petition. As however, questions of .constitutional jmportance were involved, the High Court

AJUY KUMAR v. LOCAL BOARD (Wanchoo, J.) 41>

A ?"anted a certificate under Art. 132 of the Constitution; and that t5 how the matter has come up before us.

The first question which falls for consideration therefore is whether the impost in the present case is a tax on land within the meaning of entry 49 of List II of the Seventh Schedule to the Constir B tution. It is well-settled that the entries in the three legislative lists have to oe interpreted in their widest amplitude and therefore ii a tax can reasonably be held to be a tax on land it will come within entry 49. Further it is equally well-settled that tax on land may be based on the annual value of tqe land and would still be a tax 011 land and would not be beyond the competence of the State legi!- C lature on the ground that it is a tax on income: (see Ralla Ram v.

The Province of East Punjab('). It follows therefore that the use to which the land is put can be taken into account in imposing a tax on it within the meaning of entry 49 of List II, for the annual value of land which can certainly be taken into account.in imposing a tax for the purpose of this entry would necessarily depend upon D the use to which the land is put. It is in the light of this settled proposition that we have to examine the scheme of s. 62 of the Act, which imposes the tax under challenge. • It is necessary therefore to analyse the scheme of s. 62 which provides for this tax. Section 62(1) inter alia lays down that the !l local board may order that no land shall be used as a market otherwise than under a licence to be granted by the board. Sub-section (2) of s. 62 is the charging provision and may be quoted in full :

"On the issue of an order as in sub-section (!), the board at a meeting may grant within the local limits of its 1urisdiction a licence for the use of any land as a market I' and impose an annual tax thereon and such conditions as prescribed by rules." Sub-section (3) provides that when it has been determined that a tax shall be imposed under the preceding sub-section, the local board shall make an order that the owner of any land used as a market

6 specified in the order shall take out a licence for the purpose. Such order shall specify the tax not exceeding such amount as may be prescril5ed by rule, which shall be charged for the financial year.

It will be seen from the provisions of these three sub-sections that power of the board to impose the tax arises on its passing a resolution that no land within its jurisdiction shall be used as a B market. Such resolution clearly affects land within the jurisdiction of the board and on the passing of such a resolution the hoard gets the further power to issue licences for holding of markets on lands within its jurisdiction by a resolution and al.so the nower to impose an annual tax thereon. Now it is urged on behalf of the appellant that when sub-s . (2) speaks of imposing of "an .mnual

(') (1948) F.C.R. 207.

tax thereon" it means the imposition of an annuaL tax on the A market, and that there is no provision in List II of the Seventh Schedule for a tax on markets as such. "Markets and fairs" appear at item 28 of List 11, and it is urged that under item 66 of the same List, fees with respect to markets and fairs can be imposed; but there is no provision for imposing a tax on markets in the entries rrom 45 to 63 which deal with taxes. It may be accepted B that there is no entry in List II which provides for taxes as wch on markets and fairs. It may also be accepted that entry 66 will only justify the imposition of fees on markets and fairs which would necessitate the providing of services by the board imposing the fees as a quid pro quo. That however, does not conclude the matter, for the contention on behalf of the State is that C tax under s. 62 is on land and not on the market and further the tax depends upon the use of the land as a market. It seems to us on a close reading of sub-s. (2) that when that sub-section speaks

of "annµal tax thereon", the tax is on the land but the .:barge arises only when the land is used for a market. This will also be D clear from the subsequent provisions of s. 62 which show that the tax is on land though its imoosiiion depends upon user of the land as a market. Sub-section (3) shows that as soon as sub-s. (!) and (2) are complied with, the local board shall make an order that the owner of any land used as a market shall take out the licence. Thus the tax is on the land and it is the owner of the E land who has to take out the licence for its use as a market.

The form of the tax i.e. its being an annual tax as contrasted to a tax for each day on which the market is held also shows that in essence the tax is on land and not on the market held thereon.

Further the tax is not imposed on any transactions in the market by persons who come there for business which again shows that Y

it is an impost on land and not on the market i.e. on the business therein. Then sub-s (5) provides that the tax shall be paid by the owner of any land used as a market. which again shows that it is on the land that the tax is levied, though the charge arises when it is used as a market. Sub-section (6) then lays down that on receiving the amount so fixed the board shall issue a licence to the person paying .the same. Here again the licence is for the use of

the land. Then comes sub-s. (8) which provides that whcever, being the owner or occupier of any land uses or permits the same to b~ used as a market without a licence shall be liable to fine. This provision clearly shows that the tax is on the land and it is the H owner or occupier of the land who is responsible and is liable to prosecution if he fails to take out a licence. No liability of any kind is thrown on those who come to the market for the purpose of trade. Sub-section (9) then lays down that wliere a conviction has been obtained under sub-s. (8), the District Magistrate or the Sub Divisional Officer, as the case may be, may stbp the use of the land as a market. Sub-section (] 0) then provides that every

' AJOY KUMAR v. LOCAL BOARD (W anchoo, J.) 51

A owner, occupier or tanner of a market shall cause such drain to be made therein and take all necessary steps to keep such market in a clean and wholesome state and shall cause supply of sufficient water for the purpose as well as for drinking purpose. Subsections (1 I) and (12) give power to the board on the failure of any owner, occupier or fartner to comply with a notice under sub- B s. (10), to take possession of the land and the market thereon and execute die works itself and receive all rents, tolls and other dues in respect of the market. This will again show that the tax provided by s. 62(2) is a tax for the use of the land and it is not a tax on the market as such, for the income from the market in the shape of tools, rents and other dues is not liable to tax under s. 62 and is differ- C ent from tax. The scheme of s. 62 therefore shows that whenever any land is :used for the purpose of holding a market, the owner, occupier or farmer of that land has to pay a certain tax for its use as such. But there is no tax on any transaction that may take place within the market. Further. the amount of tax depends upon D the area of the land on which market is held and the importance of the market subject to a maximum fixed by the State Government. We have therefore no hesitation in coming to the conclusion on a consideration of the scheme of s. 62 of the Act that the tax provided therein is a tax on land, though its incidence depends upon the use of the land as a market. Further as we have already B indicated s. 62(2) which uses the words "impose an annual tax

thereon" clearly shows that the word "thereon" refers to any land for which a licence is issued for use as a market and not to the word "market". Thus the tax in the present case being on land would clearly be within the competence of the State legislature.

The contention of the appellant that the State legislature was not p competent to impose this tax because there is no provision in List II of the Seventh Schedule for imposing a tax on markets as such must therefore fail.

Then we come to the contention under Art. 14 of the Constitution. As to that it is well-settled that it is for the person who alleges G that equality before law has been infringed to show that such really is the case. It was therefore for the appellant to produce facts and figures from which it can be inferred that the tax imposed in the present case is hit by Art. 14 of the Constitution. In that connection, all that the appellant has stated in his writ petition is that the board fixed a high rate arbitrarily and thus discriminated ngainst B the appellant's market as against the other neighbouring markets where the tax had been fixed at a much lower rate, and that this was hit by Art. 14. There was certainly an allegation by the appellant that Art. 14 had been infringed; but that allegation is vague and gives no facts and figures fqr holding tliat the tax imposed on the Khanna market was discriminatory. It appears that the tax was imposed for the year 1953-54, which was continued later on, with some modifications. At that time there were five

markets on which the tax was imposed including the Khanna A market. The lowest tax was at Rs. 400 /- on two markets, then at Rs .. 500/- on the third market and at Rs. 600/- on the Khanna market and fina!l y at Rs. 1000 /- on the fifth market.

Rule 300(2), framed in accordance with s. 63(3) runs thus:-

"Rs. 1000 /- (Rupees one thousand) only per annum has been fixed as the maximum amount of tax which may be levied by the local boards in Assam on markets licimsed under section 62 of the Act.

Any local board may with the previous approval of Government impose a tax within this maxim)llll according to the size and importance of a market." Now the rule provides that Rs. 1000 /- is the maximum tax and within that maximum the board has to graduate the tax according

to the size and importance of the market. The size of the. market natur; illy takes into account the area of the land en which the market is held; the importance of the market depends upon the D number of transactions that take place there, for the larger the number of transactions the greater is 'the importance of the market. If therefore the appellant is to succeed on his plea of Art. 14 on the ground that the tax (ixea on his market was discriminatory he had to adduce facts and figures, firstly as to the size bf the lll five markets on which the tax was levied in the relevant. years and secondly as to the relative importance of these markets. J}ut no such facts and figures have been adduced on behalf of the appellant. It is true that the respondent in reply to the charge of discrimination was equally vague and merely denied that there was any arbitrary discrimination. But it was for the appellant to show r that in fixing the tax on the five markets as it did, the board acted arbitrarily and did not take into account the size and importance of the markets. As there is no material before us by which we can J'Udge the relative size and importance of the five markets, it is not possible to hold that there was discrimination in taxing Khanna market at Rs. 600 /- per year as compared to taxing the three other G markets at less than Rs. 600 /-. The attack therefore on the amount actually fixed on the ground of discrimination must fail.

We therefore dismiss the appeal with costs.

Appeal dismissed.

AJOY KUMAR MUKHERJEE

LOCAL BOARD OF BARPETA

February, 11, 1965

IP. B. GAJENDRAGADKAR, C.J.

K. N. WANCHOO

M. HIDAYATULLAH,

J.

S. M. SIKRI JJ

Assam Local Self Governmemt Act 1953

s. 62

Constitution of India

Seventh Schedule

Art. 14

Seventh Schedule

s. 62

Assam Local Self Government Act, 1953

D. N. Mukherjee

Naunit Lal

Wanchoo

s. 62

Kamrup

Assam legislature

Art. 14

Seventh Schedule

Art. 14

s. 62

Assam

Kharma

Art. 132

Seventh Schedule

s. 62

s. 62

Section 62(1)

s. 62

(1948) F.C.R. 207

Seventh Schedule

s. 62

s. 62

s. 62(2)

s. 62

s. 62

s. 62

s. 62(2)

Seventh Schedule

Art. 14

Art. 14

Art. 14

Art. 14

s. 63(3)

section 62

Art. 14


COMMISSIONER OF INCOME-TAX, MADHYA PRADESH, A

NAGPUR

SETH GOVINDRAM SUGAR MILLS LTD.

March 26, 1965

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

. Partnership Act (9 of 1932), ss. 31 and 42(c)-Sco:oe of-Two joint Hindu families-Partmership between-When po.i; sfbie--!nconie-ta:c Act (11 of 1922), s. 164(1). ·

A joint Hindu family consisting of two branches owned a sugar mill. After partition, the two kartas entered into a partnership in 1943. to carry on the business of the sugar mill. The two partners represented the respective joint families, and the partnership deed provided that the death of any of .the parties shall not dissolve the partnership and either the legal heir or the nominee of the deceased partner , hould take his place. One of the kartas died in 1945 leaving as memof his branch of the family, three v.1idov,1s and two minor sons.

The other partner continued the business of the sui<ar mill in the firm

name. For the assessment year 1950-51, the assessee (respondent-firm) applied for registration on the basis of the partnership agreement of

1943. The Income-tax Officer, Appellate Assistant Commissioner And the Tribunal held that there was no partnership between the members of the two families after the death of one of the k<iTtas. On a reference to the High Court, it was held that the partnership business wa• carried on by the representatives of the two families after the de3th of one of the kartas.

In the appeal to this Cuurt, on the question as to whether during the assessment year 1950-51, the assessee, was a flrm within the meaning of s. lR(l) of the Income-tax Act, 1922, or an association of persons,

HELD: The High Court was wrong in its finding. But, as a result of the concession by the appellant, that there was a partneri:hip from 13th December 1949, when one of the minor_ sons had become a major, the status of the assessee was that of a firm for the assessment year

rn5o-5L r49BBJ

A joint Hindu family as such cannot be a partner of a firm, but it may through its karta enter into a partnershlp with the karta of another family. [4f15H] , Kshetra Mohan Saiiuasi Charan Sadhukhan v. Commissioner of Excess Profits Tax .. (1954] S.C.R. 268. followed.

A wido\v, though a member of a family, cannot become its manager. [ 495B] Commissivner of Income-tax. C.P. & Berar v. Seth Lakshmi Narayan Raghunathdas, (19481 16 I.T.R. 313 and Pandurang Dakhe v.

Pand1irang Gorle, l.L.R. (19471 NM. 299. overruled.

H Therefore, in the instant case, when one of the kartas died, the partnen; hip had come to an end. There was no scope for applying s. 42(c) of the Partnership Act. 1932, because, the section is applicable only to a partnership with more than two partners. In such a case. if one of them dies, the firm is dissolved, but if there is a contract to

c. I. T. v. GOVINDRAM Mll, LS (Subba, Ruo, J.) 489

A the contrary, the surviving partners will continue the firm. On the

'>ther hand, if there are only two partners and one of them dies, the firm automatically comes to an end and, thereafter, there ls no part. nership for a third party to be introduced.· Section 31, which deals with the validity of a contract between the partners to introduce a third party into the partnership without the consent of all the existing partners, presupposes the subsistence of a partnership and does B not cpply to a partnership of two partners. which is dissolved by

the death of one of them. [ 492E-H]

Hansraj Manot v. Me'8rs. Gorak NOJth Pandey, (1961) 66 C.W.N 262, disapproved.

Further. there was no evidence that the representatives of the two famil'es constituted a new partnership and carried on the business of the sugar mill before 13th December 1949, when, it was cone ceded a new partnership had come into existence.

C1v1L APPELLATE JURISDICTION: Civil Appeal Nos. 38 and 39 of 1964.

Appeals from the judgment and order dated April 10, 1961 of the Madhya Pradesh High Court in Miscellane-ous Civil Case No.

D 63 of 1961.

C. K. Daphtary, Attorney-General, R. Ganapathy Iyer and R. N. Sachthey, for the appellant (for both the appeals).

N. D. Karkhanis, Rameshwar Nath, S. N. Andley and P. L.

Vohra, for the respondent (in both the appeals).

The Judgment of the Court was delivered by .Subba Rao, J. These two appeals by certificate arise out of the judgment of the High Court of Madhya Pradesh, Jabalpur, in Miscellaneous Case No. 63 of 1961 from a reference under s. 66(2) of

the Indian Income-tax Act, 1922, made by the Income-tax Appellate Tribunal, Bombay.

F To appreciate the of the parties the following

genealogy will be useful:

I Govindra.m (d. in January 1943)

i Ma.danlal (predeceased his

father)

I Jankibai

I Radheyahyam (predeceaiied

his father)

I Shantibai

8hantibai

Vishwa.nath (adopted)

(b. 13-4-19tl'

Kaloora.m Todi

Nandlal (d. 9-12-1945)

I Banarsibai

I Venka.Ual (b. 13-12-1931)

Gangapras&d (d. in 1933)

Bachh•lal

(b. 25-1-JgS5)

100 8UPHEME COURT Hl<:PORTS [IUG5] 3 s:c.R,

Afler the death of Kdooram Todi, his two sons by name

and Ganguprnsad constituted a joiut Hindu family which owned extensiye in Jacra State and a sugar mill callei "Seth Govindram Sugar Mills" at Mahidpur Road in Holkar State. In the year 1942 Bachhulal filed a suit for partition against

Govindram and obtained a decree therein. In due course the pro perty was divided and a final decree was made. We are concerned in these appeals only with the Sugar Mills at Mahidpur Road. After

the partition Govindram and Bachhulal jointly \Wrked the Sugar Mills at Mahidpur Road. After the death of Govindram in 1943, Nandlal, the son of Govindram, and Bachhulal, as kartas of their respective joint families, entered into a partnership on September 28, 1943 to carry on the business of the said Sugar Mills. Nandlal died on December 9, 1945, leaving behind him the members of his branch of the joint family, namely, the thtee widows and the two minor sons shown in the genealogy. After the death of Nandlal, Bachhulal carried on the business of the Sugar Mills in the name of "Seth Govindram Sugar Mills". For the assessment year 1950-51, the said firm applied for registration on the basis of the agreement of partnership dated September 28, 1943. The Income-tax Officer refused to register the partnership on the ground that after the death of Nandlal the partnership was dissolved and thereafter

Bachhulal and the minors could be treated only as an association of persons. On that footing he made another order assessing the income of the business of the firm as that of an association of persons. Against the .said orders, two appeals-one being Appeal No. 21 of 1955-56 against the order refusing regi!ltration and the other being Appeal No. 24 of 1955-56 against the order of assess- . ment-were filed to the Appellate Assistant Commissioner. The

Appellate Assistant Commissioner dismissed both the appeals. In tlae appeal against the order of assessment, the Appellate Assistant Commissioner exhaustively considered the question whether there was any partnership between the members of the two families after the death of Nandlal and came to the conclusion that in fact as well u in law such partnership did not exist. Two separate appeals, being Income-tax Appeal No. 8328 of 1957-58 and Income-tax Appeal No. 8329 of 1957-58, preferred to the Income-tax Appellate Tribunal against the orders of the Appellate Assistant Commissioner were dismissed. The assessee made two applications to the

Tribunal for referring certain questions of law to the High Court.

but .they were dismissed. Thereafter, at the instance of the assessee the Htgh Court directed the Tribunal to submit the following two questions for its decision and it accordingly did so:

"(]) Whether on the facts and in the circumstances of the case, the status of the assessee. "Seth Govindram Sugar Mills, Mahidpur Road, Proprietor Nandlal Bachhulal, Jaora", is an Association of Persons or a firm wi!hin the meaning of Section 16(1)(h) of the Income-tax Act."

c. I. T. v. GOVI'WRAM MILLS (Subba

J.) 491

A "(2) Whether the order of the Appellate Tribunal is illegal on account of the Tribunal having committed an error of record and having omitted to consider the relevant material in the case." The High Court. for reasons given in its judgment, held on the fim :& question that in the assessment year 1949-50 the status of the

assessee was that of a firm within the meaning of s. 16(l)(b) of the

1 ncome-tax Act and on the second question it held that the Tribunal misdirected itself in law in reaching the conclusion that the parties could not be regarded as partners. The present two appeals are preferred against the said order. c

At the outset we must make it clear that the question of regietration could not be agitated in these appeals, as that question was not referred to the High Court. We shall, therefore, only consider the points raised by the questions referred to the High Court and held by the High Court agaiust the appellant. Indeed, the enlf effective question is whether during the assessment year 1950-51 tilt aSiiessee was a firm or an association of persons.

The first question raised by the learned Attorney General ii that on the death of N andlal the firm of Seth Govindram Sugar Mills was dissolved and thereafter the income of the said businCM

could only be assessed as that of an association of persons.

To appreciate this contention some more necessary facts may be atated. The deed of partnership dated September 28, 1943, was executed between Nandlal and Bachhulal. It is not disputed that each of the said two partners entered into that partnership as repretheir respective joint families. Under cl. (3) of the partnerdiip deed, "The death of any of the parties shall not dissolve the partnership and either the legal heir or the nominee of the deceasetl partner shall take his place in the provisions of the partnership."

The question is whether on the death of Nandlal his the members of his branch of the family, automatically became Ill• partners of the said firm. The auswer to the question turns upoia G s. •2 of the Indian Partnership Act, 1932 (Act 9 of 1932), tlte

material part of which reads :

"Subje.ct to contract between the partners a firm is dissolved by the. death of a partner." While for the appellant the learned Attorney General contendc4 H that s. 42 applied only to a partnership consisting of more than two partners, for the respondent Mr. Karkhanis argued that the section did not impose .any such limitation and that on its terms it equall17 applied to a partnership comprising only two partners. It was argued that the contract mentioned in the over-riding clause was a

contract between the partners and that, if the parties to the contract agreed that in the event of death of either of them his successor

would be inducted in his place, the said contract would ube binding

Sl'l'!U<.:ME COUHT gEPOHT:') I l%Gj 3 S.C.lt.

on the surviving member. On the death of one of the partners. it A was said. his heir would. be automatically inducted into the partnership, though after such entry he might opt to get out of it. This conclusion the argument proceeded also supported by s. 3 l of the Partnership Act. Section 31 of the Partnership Act reads:

"(] i Subject to contract between the partners and to , the provisions of section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners." Converting the negative into positive, under s. 31 of the Partnership Act if there was a contract between the partners, a person other than lhe partners could be introduced as a partner of the firm without the consent of all the existing partners. A combined reading of ss. 42 and 31 of the Partnership according to the learned counsel, would lead to the only conclusion that two partners of a firm could by agreement induct a third person into the partnership after the death of one of them.

There is a fallacy in this argument. Partnership, under s. 4 of the Partnership Act, is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Section 5 of the said Act says that the relation

of partnership arises from contract and not from status. The fundamental principle of partnership, therefore, is that the relation of partnership arises out of contract and not out of status. To accept the of the learned counsel is to negative the basic principle of law of pa_rtnership. Section 42 can be interpreted without doing violence either to the language used or to the said basic principle. Section 42(c) of the Partnership Act can appropriately be applied to a partnership where there are more than two partners.

If one of them dies, the firm is dissolved; but if there is a contract to the contrary, the surviving partners will continue the firm. On the other hand, if one of the two partners of a firm dies, the firm automatically comes to an end and, thereafter, there is no partnership for a third party to be introduced therein and. therefore, there is no scope for applying cl. (c) of s. 42 to such a situation. It may be that pursuant to the wishes of the directions of the deceased partner the surviving partner may enter into a new partnership with the heir of the deceased partner, but that would constitute a new partnership. In this light s. 31 of the Partnership Act falls in linewith s. 42 thereof. That section only recognizes the validity of a contract between the partners to introduce a third party without the consent of all the existing partners: it presupposes the subsistence of a partnership; it does not apply to a partnership of two partners which is dissolved , by the death of one of them, for in that event there is no partnership at all for any new partner to be inducted into it without the consent of others.

The.re is a conflict of judicial decisions on this question. The decision of the Al!ahabad High Court in Lal Ram.Kumar v.

'" 1. '!'. '" noVINDRAH {Subba Rao, J.)

/{ uhori Lal(') is not of any practical help to decide the present case.

There, from the conduct of the surviving partner and the heirs of

the deceased partner after the death of the said partner. the contract

between the original partners that the partnership should not be dissolved en the death ol any of them was inferred. Though the

p3rtnership there was only between two partners, the question of the inapplicability of s. 42(c) of the Partnership Act to such a part nership was neither raised nor decided therein. The same criticism applies to the decision of the Nagpur High Court in Chainkaran Sidhakaran Oswal v Radhakisan Vislnvanath Di.lit('). This queslion was directly raised and clearly answered by a Division Bench 0t the Allahabad High Court in Mt. Sughra v. Babu(') against tht

legality of such a term of a contract of partnership consisting of only two partners. Agarwala, J., neatly stated the principle thus:

"In the case of a partnership consisting of only two partners, no partnership remains on the death of one of

them and, therefore, it is a contrudiction in terms to say that there can be a contract betwcc,1 two partners to the effect that on the death of one of them the partner ship will not be dissolved but will continue .............. ..

. . ............ ..... Partnership is not a matter of. status, it is a matter of contract. N" heir c2n be said to become a

partner with another person without his own consent, express or implied."

This view accords with that expressed by us earlier. In Narayanan

v. Umaya[('), Ramachandra Iyer J., as he then was, said much to the same effect when he observed thus:

" ............ if one of the partners died. there will not be any partnership existing to which the legal representatives of the deceased partner could be taken in. In such a case the partnership would come to an end by the death of one of the two partners, and if the legal represen tatives of the deceased partner joins in the business later, it should be referable to a new p3rtnership between them."

But ChattCi'jee J., in Hansraj Manot v. Messrs. Corak Nath

Pandey(') struck a different note. His reasons for the contrary view are expressed thus:

"Here the contract that has been referred to ; s the contract between the two partners Gornk Nath and Champa!al -. .................... Therefore, it cannot be '"id that the contract ceased to have effect becaDse a partner died. The contract was there. There was no new contract

(') A.I.R. 1946 All. 259. (') A.I.R. rn;, o Xng 46. (') A.I.R. 1962 All. 508, ,,07. (') A.I.R. 1959 Mad. 2"?. "&4,

LjP(Xl4SC l-5

(') [1961] 68 O.W.!;', 262, 264.

with the heirs and there was no question of .a new contract with the heirs of the original contract, and by virtue of the original contract the heirs become partners as soon as one of the partners died .. .. . . . .. . .. .. .. . . As soon as there is the death, the heirs become the partners automatically without any agreement between the original partners by virtue of the original agreement between, the partners while they were surviving. There is no of interregnum. As soon as the death occurs the nght of somebody else cccurs. The question of interregnum does not arise. The heirs become partners not because of a contract between the heirs on the one hand and the other

partners on the other but because of the contract between the original partners of the firm.'.'

With great respect to the learned Judge, find it difficult to appreciate the said reasons. The learned Judge seems to suggest that

by reason of the contract between the partners, heirs of the deceased partner enter the field smmltaneously with the removal by death of the other partner from the partnership. This implies that the personality of the deceased partner projects into that of his heirs, with the result that there is a continuity of the partnership without any interregnum. There is no support either on authority or on principle for such a legal position. In law and in fact there is an interregnum between the death of one and the

to him. We accept the view of the Allahabad and Madras High Courts and reject the view expressed by Nagpur and Calcutta High Courts;

The result of the discussion is that the partnership between Nandlal and Bachhulal came to an end on the death of Nandlal on

December 9, 1945.

The question is whether after the death of Nandlal a new partnership was entered into between the representatives of the two

branches of the families, i.e .. Nandlal's and Bachhulal's: Before we consider this question it is as well that we advert to incidental questions of law that were raised. One is whether the widow of Nandlal could under Hindu law be a karta of the joint Hindu family consisting of three widowsand two minors. There is conflict of view on this question. The Nagpur l:figh Court held that a widow could be

"' karta: see Commissioner of Income-tax, C. P. & Berar v. Seth La.uni Narayan Pandurang Dahke v. Pandurang Corle('). The Calcutta High Court expressed the view that where the male members are minors and their naturat guardian is the mother, the mother can represent the Hindu undivided family for the purpose of assessment and recovery of taxes under the Incometax Act: see Sushi/a Devi Rampurla v. lncome-tax Officer('); and

(')(1948) 16 I.T.R. 313. (') I.L.R. M147tNag .. (') (1959) 38 I.T.R .. 3rn.

c. I. T. v. GOVINDRAM MILLS (Subba Rao, J.) 495

A Sm. Champa Kumari Singhi v. Additional Member, Board of Reve•

nue, West Bengal('). The said two decisions did not recogniz<! the widow as a karta of the family, but treated her as the guardian of the minors for the purpose of income-tax assessment. The said decisions, therefore, do not touch the question now raised .. The Madras and Orissa High Courts held that coparcenership is a neces- B sary qualification for the managership of a joint Hindu family and as a widow is not admittedly a coparcener, she has no legal qua!ifi-. cations to become the manager of a joint Hindu family. The decision of the Orissa High Court in Budhi Jena v. Dhobai Naik(') followed the decision of the Madras High Court in V.M.N. Radha

Ammal v. Commissioner of Income-tax, Madras(') wherein Satya- C narayana Rao J., observed:

"The right to become a manager depends upon the fundamental fact that the person on whom the right devolved was a coparcener of the joint family ............ .

Further, the right is confined to the male members of the family as the female members were not treated as coparce- D ners though they may be members of the joint family." Viswana tha Sastri J., said :

"The managership of a joint Hindu family is a creature of law and in certain circumstances, could be created by an agreement among the coparceners of the joint E family. Coparcenership is a necessary qualification for managership of a joint Hindu family."

Thereafter, the learned Judge proceeded to state:

"It will be revolutionary of all accepted principles of Hindu law to suppose that the seniormost female member of a joint Hindu family, even though she has adult sons who are entitled as coparceners to the absolute ownership ofthe property, could be the manager of the family .......

.. .. . . .. .. . .. .. . .. .. . She would be the guardian of her minor sons till the eldest of them attains majority but she would not be the manager of the joint family for she is not a coparcener."

The view expressed by the Madras High Court is in accordance with well o_f Hii:idn law, while that expressed by the Nagpur High .court 1s m d!fect conflict with them. We are clearly of the opm10n that the Madras view is correct.

. Anotho:r. which is also equally well settled may be A iomt Hmd_u family as such cannot be a partner in a firm, but 1t may, Its karta enter into a valid partnership with a stranger or with the karta of another family. This Court in Kshetrtt

(') (1961) 46 .T.T.R. 81

(') A.I.R.

Ori"• 6

(') (1950) 18 I.T.R. 225, !30, 232, 233. .

Mohan Sanyasi Charan Sadhukhan v. C.E.P.T.(') pointed out that A when two kartas of different families constituted a partnership the other members of the families did not become partners, though the karta might be accountable to them.

The question, therefore, is whether after the death of Nandlal the representatives of the two families constituted a new partner• B ship and carried on the business of the Sugar Mills. Admittedly no fresh partnership deed was executed: between Banarsibai, acting as the guardian of the minors in Nandlal's branch of the family and Bachhulal. It is not disputed that partnership between the representatives of two families can be inferred from conduct. Doubtless tho accounts produced before the income-tax authorities disclosed that c Bachhulal was carrying on the business of "Seth Govindram Sugar Mills Ltd." in the same manner as it was conducted before the death of Nandlal. Therein Kalooram Govindram and Gangaprasad Bachhulal were shown as partners, Govindram having 10 annas sh; u:e and Bachhulal having 6 annas share. There were separate current accounts for the two parties. The Appellate Assistant Com- D mi<>sioner, who examined the accounts with care, gave the followdetails from the accounts as on November l, 1948:

Joint ca.pita.I account of Kaloora.m Govindram and Gangapra.sad

Ba.chhulaJ in the ratio of 10 : 6

Current Accounts:-

Gangaprasad Bachhulal

Credit balance

Do.

Rs. . 10,78,660

10,46,797 Kalooram Govindram Do. 8,30,348 Profit & LoBS Account Debit balance 14,01,669

No profit or loss was adjusted to the current account of the F parties. Thereafter the accounts were closed as on when the capital account was squared up by transferring that much loss from the profit and loss account and balance in the profit and loss

account was transferred in the ratio of 10: 6 to the current accounts of the two parties.

Thus the profit and loss account showed:- G Net debit balance incJuding current;

year's loss Loss set off aga.inst capital account , .

Transferred to partners' a.ccounts:-

Messrs. Kalooram Govindra.m Messrs. Ganga.pre.sad Bachhulal

Balance ------

(') [1954] S.C.R. 268

Rs.

4,20,829 2,62,497

Rs. 17,61,992 10,78,666

6,73,326

6,73,326

Nil

.fl

0. I. T. v. GOVINDRAM MILLS (Subba Rao, J.) 497

The accounts only establish that Bachhulal was doing the business of Govindram Sugar Mills Ltd. But Banarsibai's name was not found in the accounts. If she was a partner, her name should have found a place in the accounts. Not a single document has been produced on behalf of the assessee which supports the assertion that

Banarsibai acted as a partner or was treated by the customers of the

firm as a partner. There is not a little of evidence of conduct of Bachhulal, Banarsibai or even of third parties who had dealings with the firm to sustain the plea that Banarsibai was a partner of the firm. Indeed, the conduct of the parties was inconsistent with any such partnership between Banarsibai and Bachhulal. After the death of Nandlal, Banarsibai and Shantibai applied to Jaora District Court for the appointment of guardians to look after the properties and the persons of the two minors; and on January 21, 1946, four persons other than these two widows were appointed as guardians of the minors. If Banarsibai was acting as a guardian of the

minors representing the family in the business, she would not have applied for the appointment of others as guardians. On October 4,

1952, a partnership deed was drawn up between Bachhulal on the one hand and the minors represented by the said four guardians on the other. If Banarsibai was the representative of the family in the business, this document would not have come into being Banarsibai also had no place in another partnership de.ed which was executed on March 27, 1953, between Venkatlal represented by the aforesaid guardians and Bachhulal. The evidence, therefore, demonstrates beyond any reasonable doubt that Banarsibai was nowhere in the picture and that Bachhulal carried on the business of the Sugar Milis on behalf d the two families. Nor is there any evidence to show that from 1943 till the assessment year the guardians of the minors appointed by the District and Sessions Judge, Jaora, in 1946

the minors entered into a partnership with Bachhula!.

The partnership deeds of 1952 and 1953 were subsequent to the order of assessment and they contain only self-serving statements

and they cannot, in the absence of any evidence, sustain the plea of earlier partnership. Indeed, the guardians were only appointed for the properties situated within the jurisdiction of the District Judge, J aora, and they could not act as guardians in respect of the properties outside the said jurisdiction. If they were acting as partners with

Bachhulal, their names would have been mentioned either in the accounts or in the relevant documents pertaining to the business.

The conflicting version given by the assessee in regard to person or persons who actually represented the family in the partnership in itself indicates the falsity of the present version. It must, therefore, be held that the Court guardians did not enter into a partnership with Bachhulal.

But, Venkatlal became a major on December 13, 1949, i.e., during the accounting year 1949-50. On October 17, 1951, an ap

plication for registration was received by the Income-tax Officer

signed by Venkatlal and Bachhula1 wno are shown as partners representing their respective joint families. The return of income submitted along with the application for registration was signed by Venkatlal on August 29, 1951. After Venkatlal became a major, there was no obstae!e in his representing his branch of the family; in the partnership. Indeed, it w:i.s conceded in the High Court that there was a partnership from December 13, 1949, when Venkatla1 attained majority. Having regard to the said circumstances and the concession, we must hold that from December 13, 1949, the business was carried on in partnership between Venkatlal, representing his branch of the family, and Bachhulal, representing his branch of the family.

In the result we set aside that part of the finding of the High Court holding that the partnership business was carried on by the representatives of the two families after the death of Nandlal, but confirm the finding to the extent that such a partnership came into existence only after December 13, 1949. In this view, we answer the two questions referred to the High Court as under:

(!) For the assessment year 1950-51 the status of the

assessee was that of a firm within the meaning of s. 16 (l)(b) of the Income-tax Act, 1922.

(2) The Tribunal misdirected itself in law in reaching the

conclusion that the parties could not be regarded as partners.

In the result the appeals are dismissed. But as the respondent failed in its main contentions, the parties will bear their own costs in this Court. ·

A ppea/s dismissed.

SETH GOVINDRAM SUGAR MILLS LTD

March 26, 1965

JK. SUBBA RAO, J

C. SHAH ANDS. M. SIKRI, JJ

ss. 31 and 42(c)

s. 164(1)

Income-tax Act, 1922

13th December 1949

s. 42(c)

Subba, Ruo

Section 31

Madhya Pradesh High Court

C. K. Daphtary

R. Ganapathy Iyer

R. N. Sachthey

N. D. Karkhanis

Rameshwar Nath

S. N. Andley

P. L.

Vohra

.Subba Rao

High Court of Madhya Pradesh, Jabalpur

s. 66(2)

Indian Income-tax Act, 1922

i Ma.danlal

Kdooram Todi

Bachhulal

Govindram

Govindram

Nandlal

September 28, 1943

December 9, 1945

Seth Govindram Sugar Mills

Income-tax Appellate Tribunal

Jaora

Section 16(1)(h)

Income-tax Act

s. 16(l)(b)

andlal

Indian Partnership Act, 1932

s. 42

Karkhanis

s. 3

Section 31

section 30

s. 31

ss. 42 and 31

s. 4

Section 5

Section 42

Section 42(c)

s. 42

s. 31

s. 42

Al!ahabad High Court

s. 42(c)

Nagpur High Court

Allahabad High Court

Agarwala

Ramachandra Iyer

ChattCi'jee

Gornk Nath

Champa!al

Allahabad and Madras High Courts

Nagpur and Calcutta High Courts

Nagpur l:figh Court

Calcutta High Court

Subba Rao

Madras and Orissa High Courts

Orissa High Court

Madras High Court

Satya- C narayana Rao

Viswana tha Sastri

Nagpur High

Madras

Banarsibai

Seth Govindram Sugar Mills Ltd.

Therein Kalooram Govindram

Gangaprasad Bachhulal

Gangapra.sad

Ba.chhulaJ in

Kalooram Govindra.m

Govindram Sugar Mills Ltd.

Shantibai

Jaora District Court

January 21, 1946

October 4,

1952

March 27, 1953

Venkatlal

Bachhula

December 13, 1949

October 17, 1951

August 29, 1951

s. 16

Income-tax Act, 1922