UNION CO-OPERATIVE INSURANCE SOCIETY LTD.,

BOMBAY

COMMISSIONER OF INCOME TAX, BOMBAY March 23, 1967

(J. C. SHAH, S. M. S!KRI AND V. RAMASWAMI, JJ.]

Indian Income-tax Act 1922, ,; 10 and Rule 6 of Schedule-llldian Insurance A.ct, 1938, s. 15-Profits of insurance companies. assessment of-Bonus paid by company to policy-holder on renewal of policies on which no claim had been made.--Estimated amoultl so payable debited by company to appropriation account and not to profit and loss account -Bonus paid during previous year whether allowable expenditure.

The appellant company carried on general insurance business.

One of the bye-laws of the company allowed payment of bonus where a policy was renewed and there had been no claim in the preceding year.

The company did not debit in its profir and loss account the amount so paid in the previous years relevant to the assessment years 1957-58 and 1958-59; it showed an amount estimated to be payable as bonus in its profit appropriation account. The Income-tax Officer held that ( i) the payment of bonus was made after the profits for the relevant year were determined and on that account it was only a case of appropriation of profits after they were earned, (ii) in any event since the company had not charged the bonus paid to revenue account and had merely made a provision in the appropriation account, it could not claim relief after modifying the accounts in Form B to Schedule I! of the Insurance Act 1938 submitted to the Controller of Insurance.' The High Court in a reference under s, 66 of the Income-tax Act held against the company The company appealed.

HELD: (i) Rule 6 of the Schedule to the Income-tax Act enjoins the Income-tu Officer to take the balance disclosed by the annual accounts as the profits and gains of insurance business other than life insurance : it does not oblige him to accept the figure disclosed at the foot of the profit and loss account in the determination of the quantum of profits and gains 1Jf the insurance buSiiness.

Section 15 of the Insurance Act requires the insurer to submit not merely the profit and loss account in Form B but also the balance sheet and the account in Form C and other accounts, and there is no warrant for the view that the balance of profits disclosed must be equated with the balance of profits disclosed in Form B. [28JG-H]

(ii) By debiting the estimated bonus payment to the profit appropriation account the company did not seek to alter the character of the expenditure. If it had been debited in the profit and loss account it cou)d not with any show of reason be regarded as not incidental to the bustness of the assessee company.

Merely because it was debited as an estimated amount an intention not to treat it as expenditure for the pur pose o~ the business is not indicated. It was open to the assessee company to debit to its annual accounts a certain outgoing actual or estimated and if sanctioned by the Controller to claim that amount or such other amount as the Income-tu Officer may irnder s. 10(2) allow as a permissible deduction.

[2R4B-D]

(iii) The bonus scheme was clearly intended to advance the business of the insurer and the expenditure in this regard was expenditure laid

out wholly and exclusively for the purpose of the business of the com pany within the meaning of s. 10(2) (xv). [284F] •

(iv) The liability of the company for payment of bonus was not a conungent liability.

So long as the year of risk bas not expired the liability is contingent, but once the year of risk is over, and the policy ra renewed the liability becomes actual and concrete.

The assessee company had not claimed the full amount for which an estimate was matle in the accounts submitted to the Controller of Insurance but only those amounts which were entered in the balance sheet as actually paid.

This expenditure could not be said to be contingent. [284 H; 285 A]

CIVIL APPELLATE JurusDICTION : Civil Appeals No. 1052 & 1053 of 1966.

Appeals from the judgment and order dated October 4, 5, c 1963 of the Bombay High Court in Income-tax Reference No. 50 of 1961.

R. l. Ko/ah, and Ravinder Narain, for the appellant.

R. M. Hazarnavis, S. K. Aiyar, S. P. Nayyar for R. N. Sachthey, for the respondent.

The Judgment of the Court was delivered by Shah, J. The Union Co-operative Insurance Society Ltd.-hereinaiter called 'the assessee Company'--carries on general insurance business. Bye-law 52 of the assessee Company provides that bonus shall be paid on those policies (not being Reinsurance Policies) on certain conditions, the following of which are relevant :

"l. That the premium on that policy is more than Rs. 5/-.

2. That there has been no claim on that policy. "3. That the policy was insured during the year for which bonus is declared.

4. That the bonus amount will be paid only if the policy is renewed on expiration and the bonus amount may be credited towards premium under the renewed policy."

In proceedings for assessment of the income of the assessee Company for the assessment years 1957-58 and 1958-59 the assessee Company claimed allowance of Rs. 29,615/- and Rs. 44,920/- respectively, paid under the bonus scheme under Bye-law 52, in the computation of its taxable income. The Income-tax Officer rejected the claim holding that payment of bonus was made after its profits for the relevant years were determined and on that account it was only a case of appropriation of profit after it was earned, and that in any event since the assessee Company had not charged the bonus paid to the revenue account and had merely made a

provision in the appropriation account, it could not claim relief after modifying the accounts in Form B to Schedule II of the Insurance Act, 1938, submitted to the Controller of Insurance. The Appellate Assistant Commissioner upheld the order of the Incometax Officer. The Income-tax Appellate Tribunal, however, held that the payments were not mere appropriation of profits, d were admissible as permissible deductions on the ground of busmess expediency. The following question submitted for determination of the High Court of Judicature at Bombay-

"Whether on the facts and in the circumstances of the case, the amounts of Rs. 29,615/- and Rs. 44,920/- paid to certain policy-holders in the calendar years 1956 and 1957 respectively by the assessee Company were admissible deductions for the purpose of computation of its taxable income for the assessment years 1957-58 and 1958-59 ?"

was answered in the negative.

The High Court held that since the amounts paid were not entered in the Profit & Loss account in Form B Schedule II to the Insurance Act and were also not regarded by the assessee Company as expenditure charged on profits, .they were not admissible as deductions in the computation of the taxable income of the assesscc Company under r. 6 of the Schedule to the Income-tax Act. With special leave, the assessee Company has appealed to this Court.

By s. 10(7) of the Income-tax Act the profits and gains of any busin_ess of ii; isurance nd the tax payable thereon are computable, notw1thstandmg apythmg to the contrary containoo in ss. 8, 9, 10,

12 or 18, in accordance with the rules contained in the Schedule to the Act. Rule 6 of the Schedule which prescribes the method of computation of taxable income of insurance business (other than life insurance) provides :

"The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts copies of whih are required under the Insurance Act, 1938, to be furmshed to the Controller of Insurance after adjusting such balance so a~ to excude from it any expenditure other han expend.1ture which may under the provisions of sect10n 10 of this Act be allowed for in computing the profits and gains of a business . . . . . "

By s. 15 of the Insurance Act 4 of 193 8 every insurer is directed to furnish to the Controller of Insurance, among others, the audited accounts and statements referred to in s. 11 of that Act.

By s. 11(1) of the Insurance Act every insurer is directed to prepare at

'.282

SUPREME OOURT REPORTS

[1967] 3 S, C.R.

the expiration of each calendar year with reference to that year, the following accounts and statements in respect of all insurance business transacted by him ;

"(a) in accoraance with the regulations contained in Part I of the First Schedule, a balance-sheet in the form setforth in Part II of that Schedule;

(b) in accordance with the regulations contained in Part I of the Second Schedule, a profit and loss account in the forms setforth in Part II of that Schedule, except where the insurer carries on business of one class only of the classes specified in clauses (a), (b) and (c) of subsection (1) of section 7 and no other business."

Section 21 of the Insurance Act authorises the Controller of Insurance, if it appears to him that any return furnished to him under the provisfons of the Act is inaccurate or defective in any respect, to require the insurer to correct or supplement such return, or to call upon the insurer to submit for his examination any book of . account, register or other document or to examine any officer of

the insurer on .oath in relation to the return, or to decline to accept any such return unless the inaccuracy has been corrected or the deficiency has been supplied.

By s. 22 the Controller has the power to order investigation or re-valuation to be made by an actuary .appointed by the insurer for the purpose. Having regard to the wide powers conferred upon the Controller, the Income-tax Act has in respect of the business of insurance, other than life insu ranee, provided that the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 193 8, to be furnished to the Controller of Insurance, shall be accepted by the Income-tax Officer, subject to any adjustment he may make so as to exclude from it any expenditure other than expenditure which may under the provisions of s. 10 of the Incometax Act be allowed for in computing the profits and gains of the business. ·

It is common ground that the assessee Company had submitted its balance-sheet, the profit & loss account and profit & loss appropriation account.

The balance-sheets for the two years 1956 and 1957 have not been printed in the record and only the profit & loss accounts and the profit & loss appropriation accounts have been printed. In the statements of profit & loss account (Form B) for the years 1956 and 1957 disbursements by way of bonus to the renewing policy-holders under Bye-law 52 are not included.

But in the profit & loss appropriation accounts (Form C) for the years 1956 and 1957 entries for allocations for Rs. 50,000/ • and Rs. 70,000 /' respectively are made under the head "Policy-holders

Bonus Fund". In Form .'B' in Schedule II of the Insurance Act

under the head "Other Expenditure (to be specified)", outgoings other than taxes, expenses of management, loss on realization of investments, depreciation and loss transferred from Revenue Account are required to be included. In Form C which is the form of profit & loss appropriation account the following appropriations are directed to be made :

"Balance being loss brought forward from last year.

Ralance being loss for the year brought from Profit & Loss Account (as in Form B).

Dividends paid during the year on account of the current year.

Transfers to any particular Funds or Accounts, and Balance at the end of the year as shown in the Balance-Sheet." The assessee Company in drawing up its profit & loss account instead of showing the actual disbursement in Form B against the head "Other Expenditure" estimated the amounts which it would be liable to pay and debited the same against the head "Transfers to any particular Funds or Accounts" in Form C. The High Court held that r. 6 merely provides for adjustment of the balance of expenses which are in the opinion of the Income-tax Officer not permissible allowances under s. 10, and on that hypothesis inferred that the annual accounts referred to in r. 6 of the Schedule mean the profit & loss account submitted in Form B and not the profit & loss appropriation account submitted in Form C. In our judgment that view cannot be sustained. In Form B expenditure which is 111ready incurred or which is capable of being actllally ascertained at the close of the year may be included. But the insurer who has incurred a liability may allocate (subject to adjustment in the balance-sheet) an estimated amount out of the profit & loss account and enter it in the profit & loss appropriation account. The Controller of Insurance may, if he is not satisfied with the correctness of the estimate, or the allocation refuse to accept it, and may call upon the insurer to rectify the accounts. If the Controller certifies the accounts, the expenditure cannot be disallowed by the Incometax Officer, merely because it is not entered in the profit & loss account, and is found appropriated in the profit & loss appropriation account. Rule 6 of the Schedule to the Income-tax Act enjoins the Income-tax Officer to take the balance disclosed by the annual accounts as the profits and gains of insurance business other than life insurance : it does not oblige him to accept the figure disclosed at the foot of the profit & loss account as determinative of the quantum of profits and gains of that insurance business. Section 15 requires the insurer to submit not merely the profit & loss account in Form 'B', but also the balance-sheet and the account in Form 'C' and other accounts, and there is no warrant for the view

that the balance of profits disclosed by the annual account must be equated with the balance of profits disclosed in Form 'B'.

The other plea which appealed to the High Court that the assessee Company had itself not treated the bonus paid as an expenditure related to the business, but only as disbursements made out of the profit after it had accrued to the assessee Company, also cannot be sustained. The assessee Company maintains its accounts according to the mercantile system. It chose to estimate the liability arising under Bye-law 52 in respect of the business transacted by it, and debited it in the profit & loss appropriation account. By adopting that method of accounting the assessee Company did not seek to alter the character of the expenditure. If it had been debited in the profit & loss account it could not with any show of reason be regarded as not incidental to the business of the assessee Company. Merely because it was debited as an estimated amount, an intention not to treat it as expenditure for the purpose of the business is not indicated.

In our judgment, it was open to the assessee Company to debit in its annual accounts a certain outgoing actual or estimated, and if sanctioned by the Controller to claim that amount or such other amount as the Income-tax Officer may under s. 10(2) allow as a permissible deduction.

The High Court did not express any view on the question whether the expenditure was a permissible allowance under s. 10(2)(xv) of the Income-tax Act. It appears from the scheme for payment of bonus to the policy-holders who renew their policies that bonus would be admissible if there was no claim on the policy and the renewal policy was issued during the year for which bonus was declared. This scheme was evolved to induce the policy-holders to renew their policies with the assessee Company. Even if no immediate benefit results therefrom to the trade of the insurer, the scheme is clearly intended to advance the business of the insurer, and payment to renewing policy-holders or adjustment of bonus against renewal premium made under that scheme constitutes expenditure laid out wholly and exclusively for the purpose of the business of the assessee Company.

Counsel for the Commissioner contended that the estimated liability was not "crystallised liability'' and was on that account inadmissible as an allowance in the computation of taxable income.

The liability, submitted counsel, was a mere contingent liability which could not amount to expenditure within the meaning of s. 10(2)(xv), nor a permissible outgoing in the determination of the income, profits or gains of the business. This question was appa rently not raised before the Tribunal. Assuming that it could be raised before the High Court and this Court, we are of the view that under the scheme of Bye-law 52, the liability is not a con tingent liability. So long as the year of risk has not expired, the

co-OP. INSUllANCB SOCY. v. C.I.T. (Shah, !.) 285

liability is contingent; but once the year of risk is over, and the policy is renewed the liability becomes actual and concrete. Theassessee Company has not claimed the full amount for which an estimate was made in the accounts submitted to the Controller of Insurance, but only those amounts which were entered in the balance-sheet as actually paid. This expenditure cannot be said to be "contingent".

It was finally said that under s. 41 of the Insurance Act there is prohibition against the grant of any rebate and it is urged that no insurer. can in the course of assessment proceedings claim deduction in respect of the amounts allowed by him by way rebate when grant of rebate is expressly prohibited by statute. Section 41(1) of the Insurance Act prohibits the allowance or offer of allowance either directly or indirectly as an inducement to any person to take out or renew or continue an insurance in respect of any kind of risk relating to lives or property in India. But the question whether grant or bonus is a rebate within the meaning of s. 41 was never raised before the Tribunal This Court will not be justified in entering upon an investigation whether payment of bonus was in the nature of rebate and on that account offended s. 41 of the Insurance Act.

The answer recorded by the High Court will be discharged and an answer in the affirmative be recorded on the question submitted.

The appeals will be allowed. The assessee Company will be entitled to its costs in this Court and the High Court. One hearing fee.

G.C.

Appwls allowed.

COMMISSIONER OF INCOME TAX, BOMBAY

March 23, 1967

C. SHAH

V. RAMASWAMI, JJ.

Indian Income-tax Act 1922

s. 15

Schedule I

Insurance Act 1938

Income-tax Act

Income-tax Act

Section 15

Insurance Act

s. 10(2)

s. 10(2)

R. l. Ko

Ravinder Narain

R. M. Hazarnavis

S. K. Aiyar

S. P. Nayyar

R. N. Sachthey

Shah

High Court of Judicature at Bombay-

Income-tax Act

s. 10(7)

Income-tax Act

ss. 8, 9, 10,

12

Insurance Act, 1938

s. 15

Insurance Act

s. 11

s. 11(1)

Insurance Act

First Schedule

Second Schedule

section 7

Section 21

Insurance Act

s. 22

Income-tax Act

Insurance Act

s. 10

Schedule II of the Insurance Act

s. 10

Income-tax Act

Section 15

s. 10(2)

s. 10(2)(xv)

Income-tax Act

s. 10(2)(xv)

s. 41

Insurance Act

Section 41(1)

Insurance Act

India

s. 41

s. 41

Insurance Act


JOHRIMAL v.

DIRECTOR OF CONSOLIDATION. OF HOLDINGS, PUNJAB

March 28, 1967

[K. N. WANCHOO, R. S. BACHAWAT AND V. RAMASWAMI, JJ.J B

East Punjab Holdings (Consolidation and Prevention of Fragmentation) Act, 1948 (East Punjab Act 50 of 1948) S.<. 18, 36 and 42 and Rules 16(ii)-Sclie111e confirmed-If can be varied by State-Procedure-Proprietors' Gher land taken and formed illfo common pool- Legality.

A scheme was prepared and confirmed under s. 20 of the East Punjab Holdings (Consolidation and Pre.vention of Fragmentation) Act, 1948. providing that the owners of permanent ghers or enclosure• would be permitted to retain them in their possession.· The respondent, under s. 42 of the Act, reconsidered this matter and ordered that the plot of the appellant, who had. made a gher, should be kept for non-proprietors and consolidation records should be changed to that effect. The appellant successfully challenged the respondent's order in a writ petition, which in appeal was reversed.

Jn appeal to this Court, the appellant contended that (i) the power of the State Government under s. 42 was controlled by the procedure prescribed under s. 36 if it involved a variation of the r.onfirmed scheme and the order of the respondent wa• ultm vires since the procedure contemplated by s. 36 had not been followed, and (ii) the

respondent's order was illegal as it violated s. 18(c) and Rule 16(ii) beca11se under Rule 16(ii) only a fraction of each proprietors' land could be taken and formed into a common pool so that the whole may be used for the common needs and benefits of the. estate and there was no such reason mentioned in the impugned order as required by s. 18.

HELD : (i) The power conferred on the State Government by s. 42 is not controlled by s. 36 and the procedure of publication and hearing objections contemplated by ss. 19 and 20 of the Act is not necessary.

Sections 36 and 42 envisage two different situations and the inten:ion of the Act is to give powers rcspectivoly to the Confirming Authority and to the State Government to act under these sections in their discretion in any particular case.

The reason for two different provisions in ss. 36 and 42 of the Act is also clear for if a scheme is varied or revoketl by the authority confirming it, then the new scheme has to be published so that interested parties may object and their objection decided by competent authorities se.t up under the Act those decisions

being finally appealable to the State Government.

But when a scheme is to be varied by the State Government itself under s. 42 of the Act, there is no requirement of the statute that the varied scheme should be published.

The State Government is only required to give notice and to give an opportunity to the interested parties to be heard before the variation is made. [293G-294Bl ·

(ii) The respondent's order was illegal.

In view of the decision in Ajit Singh v. Tile State of P1111j11h, [1967] 2 S.C.R. 143 the wide interpretation of " 18(c) would make the operation of the section unconstitutional.

It is a well c•'.ablishcd rule that a slu:ulc has to he so read ns to make it valid., it has to he construccl 11t res n1agi.\' valeat quani pareat.

Applying the principle to the present e•i.c, it is manifest that

s. !S(c) must be read in a restricted sense and the authority of the Consolidation Officer to reserve land for the common purpose under s. 18(c) of the Act must be restricted and it must be held that the Consolidation Officer has power under the section to take the land out of the comlr\on pool of the village only according to the rateable shre fn; m

the propnetors and othr right-holders for any common purpose mcludmg the extension of the village ahadi. It is also clear that the power of the State Government to make reservation of land for common purposes under s. 42 is co-terminus with the power of the Consolidation Officer under s. !S(c). [296G-297D]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 153 of 1964.

Appeal from the judgment and order dated November 8, 19.60 of the Punjab High Court in L. P.A. No. 284 of 1958.

Bishan NaraiTJ, B.R.L. Iyengar, S. K. Mehta and K. L. Mehta, for the appellant.

Gopa/ Singh, S. P. Nayyar for R. N. Sachthey, for the respondents.

The Judgment of the Court was delivered by Ramaswami, J. This appeal is brought, by certificate, from the judgment of the Punjab High Court dated Novem ber 8, 1960 in Lettrs Patent Appeal No. 284 of 1956.

For the consolidation of land holdings in village Kheowara, a scheme was prepared by the Consolidation Officer under s. 14 of the East Punjab Holdings (Consolidation and Prevention of Fragmentation) Act, 1948 (Act L of 1948), hereinafter called the 'Act',

and the scheme was confirmed by the Settlement Officer acting under s. 20 of the Act. The scheme, among other things, provided that the owners of permanent ghers or enclosures will be permitted to retain them in their possession. One of the proprietors, Johrimal had made a gher in khasra No. 3942 and, under the scheme, this was to remain with him. Para 7 of the Scheme which was finalised under s. 20 of the Act provided as follows :

"The existing houses and permanent enclosures shall be kept in the ownership and possession of those proprietors who were owners in possession prior to the consolidation and in addition if these persons so desire, they shall be entitled to be given additional area upto one bigha for extension of the abadi. In the case of such persons of right holders who have constructed houses or enclosures etc. within the Shamlat area they would keep them in teir possession but adjustment would be made out of then Khewat land ...... , .... ·,. ,."

Later on the Director of Consolidation, to whom the powers of the State Government under s. 42 of the Act had been delegated

J:econsidered this matter and ordered that this particular piece of -land i.e., khasra No. 3942 should be reserved for the extension of abadi for non-proprietors. The Director of Consolidation accordingly ordered that instead of bein$ reserved for Johrimal, the plot 'Should be kept for the non-propnetors and the Consolidation re' Cords should be changed to that extent. The order of the Director of ConsolidatiQft was dated March 8, 1957. Aggrieved with this order, Johrimal applied to the High Court for grant of a writ under Art. 226 of the Constitution. The petition was heard by Grover, J. who allowed the petition holding that the Director of Consolidation had no authority to make any order contrary to the scheme without amending the scheme itself, and an amendment of the scheme could be made only under s. 36 of the Act and not •Under s. 42 of the Act. It was accordingly held that the order of the Director of Consolidation was ultra vires and must be quashed by grant of a writ in the nature of certiorari. Against this order the Director of Consolidation of Holdings appealed under cl. 10 of the Letters Patent. The appeal wa5 heard by a Full Benclt which, by its Judgment dated November 8, 1960, allowed the appeal and reversed the order of the learned Single Judge and ordered that the writ petition should be dismissed.

The view taken by the majority of the Judges of the Full Bench was that the impugned order amounted to an alteration of the Consolidation scheme and the State Government had power, under s. 42 of the Act as amend- . ed by the East Punjab Holdings (Consolidation and Prevention of Fragmentation) (Second Amendment and Validation) Act (Punjab Act 27 of 1960), to make any change in the Consolidation schem" subject to the requirements of that section. The present appeal is brought by Johrimal against the judgment of the Full Bench of the Punjab High Court.

The Act was passed to provide for the compulsory consolidation of agricultural holdings and for preventing the fragmentation of

aicultural holdings in the State of Punjab. Chapter III of the Act deals with Consolidation of Holdings and it is provided by s. 14 that the Government may either suo motu, or on application made, declare its intention by notification to make a scheme for consolidation of holdings in an estate or estates or part thereof as may be specified. The Consolidation Officer is required to obtain the advice of the land owners and of the non-proprietors and of the Gram Panchayat and he is thereafter directed to prepare a Scheme for the consolidation of holdings. Section 15 requires the Consolidation Officer to provide for the payment of compensation to any owner who is allotted a holding of less market value than his original holding and for the recovery of compensation from any owner who is allotted a holding of greater market value than that of his original holding. Under s. 19, the Consolidation Officer shall cause to be published the draft scheme of consolidation, and

within 30 days of such publication any person likely to be affected by such scheme may communicate in writing to the Consolidation Officer, any objection relating o it. The Consolidation Officer shall then consider the objections, if any and submit the scheme with such amendments as he may consider to be necessary together with his remarks on the objection to the Settlement Officer (Con solidation). The scheme as amended shall then be published. Sec tion 20 provides that if no objections are received to the draft scheme, the Settlement Officer (Consolidation) shall confirm the scheme. If objections are received, then the Settlement Officer (Consolidation) may either confirm the scheme, with or without modifications, or refuse to confirm it. If the scheme is confirmed it should be published. Section 21 relates to repartition to be carried out by the Consolidation Officer in accordance with the scheme as confirmed under s. 20 and the boundaries of the holdings as demarcated are required to be shown on the shajra which shall be published in the prescribed manner in the estate or estates con

cemed. Any person aggrieved by the repartition may file written objections before the Consolidation Officer who shall after hearing the appellant pass such order as he considers proper. An appeal is provided from the order of the Consolidation Officer to the Settlement Officer (Consolidation).

A person aggrieved by the order of the Settlement Officer (Consolidation) may appeal to the State Government. Section 22 provides for the preparation of a new record-of-rights by the Consolidation Officer in accordance with the provisions contained in Ch. IV of the Punjab Land Revenue Act: .1887 for !he area under onsolition, giving effect to the repart1t1on. Section 23 deals with the nghts to possession of new holdings. Section 36 provides for the power to vary or revoke the scheme and reads as follows :

"A scheme for the consolidation of holdings confirmed under this Act may, at any time, be varied or revoked by the authority which confirms it subject to any order of the State Government that may be made in relation thereto and a subsequent scheme may be prepared published and confirmed in accordance with the provi: sions of this Act."

Section 42 of the Act, as it originally stood, was to the following effect :

"The State Government may at any time for the purpose of satisfying itself as to the legality or propriety of any order passed by any officer under this Act call for and examine the record of any case pending before or disposed of by such officer and may pass such order in reference thereto as it thinks fit :

Provided that no order shall be varied or reversed without giving the parties interested notice to appear and opportunity to be heard except in cases where the State Government is satisfied that the proceedings have been vitiated by unlawful consideration." Section 18 of the Act is important and provides as follows :

"Notwithstanding anything contained in any law for the time being in force, it shall be lawful for the Consolidation Officer to direct-

(a) that any land specifically assigned for any common purpose shall cease to .be so assigned and to assign any other land in its place;

(b) that any land under the bed of a.stream or torrent flowing through or from the Siwalik mountain range within the State shall be assigned for any common purpose;

(c) that if in any area under consolidation no land is reserved for any common purpose including extension of the village abadi or if the land so reserved is inadequate, to assign other land for such purpose." Section 46 of the Act confers powers on the State Government to make rules for carrying out the purposes of the Act and in particular to provide for :

"(e) the manner in which the area is to be reserved under s. 18 and the manner in which it is to be dealt with and also the manner in which the village abadi is to be given to proprietors and non-proprietors (including sche duled castes, Sikh backward classes, artisans and labourers) on payment of compensation or otherwise;" On March 3, 1956 the Punjab Government, by a notification, add ed rule 16 to the Rules for reservation of the abadi for the pro ._prietors as well as the non-proprietors and it read as follows :

"The area to be reserved for the common p1i1rpose of extension of abadi for proprietors and non-proprietors under section 18(c) of the Act shall be reserved after scrutinizing the demand of proprietors desirous of build ing houses and of non-proprietors including Harijan families working as agrarian labourers who are in need of a site for house.

The land reserved for extension of abadi shall be divided into plots of suitable sizes. For the plots allotted to proprietors area of equal value shall be deducted from their holdings but in the case of non proprietors including Harijan families these shall be allotted without payment of compensation and they shalJ

be deemed to be fUll owners of the plots allotted to them." On April 9, 1957 the Punjab Government added rule 16(ii) which provided for reservation of lands for the Gram Panchayat. It read as follows : • "In an estate or estates where during consolidation proceedings there is no shamlat deb land or such land is considered inadequate, land shall be reserved for the village Panchayat, under section 1 S(c) of the Act, out of the common pool of the village at a scale prescribed by Government from time to time.

Proprietary rights in nspect of land, so reserved (except the area reserved for the extension of abadi of proprietors and non-proprietors) shall vest in the proprietary body of the estate or estates concerned, and it shall be entered in the column of ownership of record of rights as (jumla malikan wa digar haqdaran arazi hasab rasad raqba).

The management

~ of such land shall be done by the Panchayat of the estate or estates concerned on behalf of the village proprietary body and the Panchayat shall have the right to utilize the income derived from the land so reserved for the common needs and benefits of the estate or estates concerned."

In Munsha Singh v. State of Punjab('), the Punjab High Court declared n1le 16(ii) as ultra vires. After the decision of that case the second amending Act (27 of 1960) was passed. It gave a legal cover to rule 16(ii) by including in s. 2 of the Act the following :

"2(bb) 'Common purpose' means any purpose in relation to any common need, convenience or benefit of the village and includes the following purposes :-

(i) extension of the village abadi;

(ii) provide income for the Panchayat of the village concerned for the benefit of the village community;

(iii) village roads and paths; village drains; village wells, ponds or tanks; village water-courses or water channels; village bus stands and waiting places; manure pits; hada rori; public latrines; cremation and burial grou!lds; Panchayat Ghar; Janj Ghar; grazing grounds; tanmng places; mela grounds; public places, of religious or charitable nature; and

(iv) schools and playgrounds, dispensaries, hospitals and institutions of like nature, waterworks or tube-wells, whether such schools, play grounds, dispensaries, hospi-

<ll l.L.R. [19601 1 Punjab, 589.

L5Sup, Cl/67-Q

tals, institutions, water-works or tube-wells may be managed and controlled by the State Government or not."

Section 2 of the amending Act (Act 27 of 1960) amended the preamble and read as follows :

"Amendment of long title of East Punjab Act L of 1948.-In the long title of the East Punjab Holdings (Consolidation and Prevention of Fragmentation) Act, 1948 (hereinafter referred to as the principal Act), the words 'and for the assignment or reservation of land for common purposes of the village' shall be, and shall be deemed always to have been, added at the end." Section 4 added a new section 23-A which was to the following effect :

"Management and control of lands for common purposes to vest in Panchayats.-As soon as a scheme comes into force, the management and control of all lands assigned or reserved for common purposes of the village under section 18 shall vest in the Panchayat of that village which shall also be entitled to appropriate the income accruing therefrom for the benefit of the village community, and the rights and interests of the owners of such lands shall stand modified and extinguished accordingly." Section 5 amended s. 42 of the Act and was to the following effect :

"Amendment of section 42 of East Punjab Act L of 1948.-In section 42 of the principal Act, for the words 'any order passed by any officer under this Act', the words 'any order passed, scheme prepared or confirmed or repartition made by any officer under this Act', and for the words 'no order shall be varied' the words 'no order, scheme or repartition shall be varied' shall be, and shall be deemed always to have been, substituted."

Section 6 provides for validation and reads as follows :

"Notwithstanding anything to the contrary contained in any judgment, decree or order of any court,-

(a) where in any scheme, made before the commencement of this Act, land has been reserved for the Panchayat of the village concerned for utilising the income thereof, or

(b) where before such commencement the State Govvernment or any authority to whom it has delegated its powers has passed an order under section 42 of the principal Act revising or rescinding a scheme prepared or

confirmed or repartition made by any officer under that Act.

such reservation of land or such order, as the case may be, shall be deemed to be valid, and any such scheme or order shall not be questioned on the ground that such reservation of land could not be made or, as the case may be, that under section 42 of the principal Act, the State Government or such authority had no power to pass such order."

On behalf of the appellant Mr. Bishen Narain put forward the argument that the order of the Director of Consolidation dated March 8, 19 5 7 was an order varying para 7 of the confirmed scheme and no such variation could be made without following the procedure laid down under s. 36 of the Act, viz., the requirement with regard to the publication and hearing of objections contemplated in ss. 19 and 20 of the Act. To put it differently, the contention of the appellant was that the power of the State Government under s. 42 was controlled by the procedure prescribed under s. 36 if it involved a variation of the confirmed scheme and the order of the Director dated March 8, 1957 was ultra vire~ since the procedure contemplated by s. 36 of the Act has not been followed.

In our opinion, there is no justification for this argument.

Section 42 of the Act as amended by Act 27 of 1960 authorised the State Government to interfere with the scheme of consolidation or repartition made under the Act.

What the amending Act has done is to substitute for the words 'any order passed by any officer under this Act', the words 'any order passed, scheme prepared or confirmed or repartition made by any officer under this Act'. Section 3 6 of the Act, on the other hand, authorises the authority confirming a scheme to alter or revoke it and in that case the new scheme must be published, objections heard and decided and the scheme has to be confirmed once again in accordance with the procedure under ss. 19 and 20 of the Act. In our opinion the power conferred on the State Government under s. 42 is.a separate power independent of s. 36 of the Act which deals with the power of the authority confirming the scheme. There is hence no force in the contention that the scheme of consolidation cannot be varied by the State Government under s. 42 of the Act except in accordance with s. 36 of the Act. The reason for the two different provisions in ss. 3 6 and 4 2 of the Act is also clear for if a scheme is varied or revoked by the authority confirming it, then the new scheme has to be published so that interested parties may object and their objection decided by competent authorities set up under the Act, those decisions being finally appealable to the State Government. But when a scheme is to be varied by the State Government itself under s. 42 of the Act, there

is no requirement of the statute that the varied scheme shollld be published, for the State Government is required to give notice and to give an opportunity to the interested parties to be heard before the variation is made.

We are therefore of the opinion that the power conferred on the State Government by s. 42 is not oontrolled by s. 36 and the procedure of publication and hearing objections contemplated by ss. 19 and 20 of the Act is not necessary.

Sections 3 6 and 42 envisage two different situations and the intention of the Act is to give powers respectively to the Confirming Authority and to the State Government to act under these sections in their discretion in any particular case. We accordingly hold that Mr. Bishen Narain is unable to make good his argument on this aspect of the case.

We proceed to consider the next question arising in this appeal, viz., whether the order of the Director dated March 8, 1957 is illegal because it violates s. l 8(c) of the Act read with Rule 16(ii).

It was contended for the appellant that under Rule 16(ii) only a fraction of each proprietor's land is taken and formed into a common pool so that the whole may be used for .the common needs and benefits of the estate. The argument was stressed that Rule l 6(ii) contemplates that all the proprietors and other right holders of the land are entered in the column of ownership of the record of rights according to the rateable share and therefore the land taken by each proprietor should be according to the rateable share of the land possessed by him in the total area of the village. It was pointed out that the order of the Director dated March 8, 1957 does not indicate that the area taken from the appellant was in proportion to the rateable share. It was also stated that s. 18(c) requires that before the Consolidation Officer directs reservation of any land for the village abadi, no land should have been reserved for a common purpose in the area under consolidation or the lands so reserved should have been inadequate. It was pointed out that in the order of the Director there is no mention that no land had been reserved for the common purpose in the village or that the land so reserved in the scheme was inadequate. The opposite view-point was presented by Mr. Gopal Singh on behalf of the respondents. It was contended that s. 18(c) gives a wide power to the Consolidation Officer to reserve any land for the common purpose including extension of the village abadi and there is no requirement imposed in the section that the land reserved should be taken from the proprietors and other right-holders in accordance with their rateable share. It was contended by the respondents that no limitation should be placed on the plain language of the section.

In our opinion, the argument put forward on behalf of the appellant is well-founded and must be accepted as correct. It is true thats. 18(c) confers a power on the Consolidation Officer to reserve.

.. c

the land of the proprietors for any common purpose including the extension of the village abadi and there is no express limitation in the language of the section to the effect that the land to be taken from the proprietors and other right-holders should be according to the rateable share. But the language of s. 18(c) should be interpreted in a reasonable manner. The legislature could not have intended that land should be taken from one proprietor only for common purposes.

The intention must be that all proprietors should contribute rateably for such purposes.

This intention is brought out by Rule l 6(ii)' and this is what s. l 8(c) must be held to mean. In this context reference should be made to the decision of this Court in Ajz't Singh v. The State of Punjab('). The question at issue in that case was whether the reservation of land for a common purpose under s. 18(c) of the Act amounted to "acquisition by the State of any estate or rights therein" within the contemplation of the second proviso to Art. 3 lA(l) of the Constitution, and if so, whether compensation should be paid to the proprietors for the land reserved in the scheme for varions purposes in accordance with the second proviso to Art. 31A(l) inserted by the Seventeenth Amendment of the Constitution. It was held by the majority judgment of_ this Court that s. 18(c) must be construed reasonably and that only a fraction of each proprietor's land was taken and formed into a common pool, so that the whole may be used for the common needs and benefits of the village. It was pointed out that the title will vest in the proprietaty body, the management of the land was done by the Panchayat of the estate on behalf of the proprietary body and the land was used for the common needs and benefits of the estates concerned. It was therefore held that Rule 16(ii) only provides for adjustment of rights of persons holding !and ~°. eserved in he !ntrest of villae economy and there was no acqu!Sitlon of land w1thm the meanmg of the second proviso to ;\ft. 31-A(l) and th:re was no question of paying compensation m cash to !h: proprietor~ f?r such adjustment of rights. In the course of his judgment, S1kn, J., speaking for the Court, observed as follows : •

"In Attar Singh v. The State of U.P. (1959 Supp.

S.C.R. 9~8 a~ p. 938) Wanchoo J., speaking for the Court, said this of the similar proviso in a similar Act namely, the U.P. Consolidation of Holdings Act (Up'

~9~7~ of 1954) as amended by the U.P. Act XVI "0 {

. 'Thus the land which is taken over is a small bit which s?ld by itself would hardly fetch anything.

Thes~ small bits of lands are collected from various tenure-holders and consolidated in one place and added to the land

296 SUPREME COURT P.BPOllTS

[1967) 3 S.C.R.

which might be lying vacant so that it may be used for the purposes of s. 14(1) (ee), A compact area is thus created and it is used for the purposes of the tenure-holders themselves and other villagers. Form CH-21 framed under r. 4l(a) shows the purposes to which this land would be applied, namely, (1) plantation of trees, (2) pasture land, (3) manure pits, (4) threshing floor, (5) cremation ground, (6) graveyards, (7) primary or other school, (8) playground, (9) Panchayat ghar, and (10) such other objects.

These small bits of land thus acquired from tenure-holders are consolidated and used for these purposes, which are directly for the benefit of the tenure-holders.

They are .deprived of a small bit and in place of it they are given advantages in a much larger area of land made up of these small bits and also of vacant land.' In other words, a proprietor gets advantages which he could never have got apart from the scheme. For example, if he wanted a threshing floor, a manure pit, land for D pasture, khal, etc., he would not have been able to have them on the fraction of his land reserved for common purposes.

Does such taking away of property then amount to acquisition by the State of any land ? Who is the real beneficiary ? Is it the Panchayat ? It is clear that the title remains in the proprietary body and in the revenue records the land would be shown as belonging to 'all the owners and other right holders in proportion to their areas'. The Panchayat will manage it on behalf of the proprietors and use it for common purposes; it cannot use it for any other purpose. The proprietors enjoy the benefits derived from the use of land for common purposes. It is true that the non-proprietors also derive benefit but their satisfaction and advancement enures in the end to the advantage of the proprietors in the form of a more efficient agricultural community. The Panchayat as such does not enjoy any benefit. On the facts of this case it seems to us that the beneficiary of the modification of rights is not the State, and therefore there is no acquisition by the State within the second proviso."

In view of this decision the wider interpretation of s .. 1 S(c) for which Mr. Gopal Singh contends would make the operation. of .the section unconstitutional. In a situation of this kind the prmc.1ple H to be applied is clear. The principe is that if two ostrucli?ns of a statute are possible, one of which would make 1t zntra vres and the other ultra vires, the Court must lean to that construction

which would make the operation of the section intra vires.

The reason is that no intention can be imputed to the Legislature that it would exceed its own jurisdiction. It is a well-established rule that a statute has to be so read so as to make it valid; it has to be construed ut res magis va/eat quam pareat. Applying the principle to the present case, it is manifest that s. l 8(c) must be read in a restricted sense and the authority of the Consolidation Officer to reserve land for the common purpose under s. 18(c) of the Act must be restricted in the manner indicated above, and it must be held that the Consolidation Officer has power under the section to take the land out of the common pool of the village only according to the rateable share from the proprietors and other right-holders for any common purpose including the extension of the village abadi. It is also clear that the power of the State Government to make reservation of land for common purposes under s. 42 is coterminus with the power of the Consolidation Officer under s. 18(c) and it follows therefore that the order of the Director dated March 8, 1957 is illegal and ultra vires and must be quashed by grant of a writ in the nature of certiorari under Art. 226 of the Constitution.

For these reasons we set aside the order of the Punjab High Court dated November 8,. 1960 and direct that a writ in the nature of certiorari should be issued to quash the order of the Director of Consolidation of Holdings, Punjab dated March 8, 1957 with regard to khasra No. 3942 reserving it for extension of abadi for non-proprietors. The appeal is accordingly allowed, but there will be no order as to costs.

Y.P.

Appeal allowed.

JOHRIMAL

DIRECTOR OF CONSOLIDATION OF HOLDINGS, PUNJAB

March 28, 1967

K. N. WANCHOO

R. S. BACHAWAT

V. RAMASWAMI, JJ

East Punjab Act

s. 20

s. 42

s. 42

s. 36

s. 36

s. 18(c)

s. 18

s. 42

s. 36

ss. 19 and 20

Sections 36 and 42

ss. 36 and 42

s. 42

[1967] 2 S.C.R. 143

s. 18(c)

s. 42

B.R.L. Iyengar

S. K. Mehta

K. L. Mehta

Gopa/ Singh

S. P. Nayyar

R. N. Sachthey

Ramaswami

Novem ber 8, 1960

Kheowara

s. 14

s. 20

Johrimal

s. 20

Shamlat

s. 42

March 8, 1957

Art. 226

Grover

s. 36

s. 42

cl. 10

November 8, 1960

s. 42

Punjab High Court

Punjab

Chapter III of the Act

s. 14

Section 15

s. 19

Section 21

s. 20

Section 22

IV of the Punjab Land Revenue Act

Section 23

Section 36

Section 42

Section 18

Section 46

s. 18

March 3, 1956

Punjab Government

section 18(c)

April 9, 1957

section 1

s. 2

Section 2

Section 4

section 23

section 18

Section 5

s. 42

section 42

East Punjab Act

section 42

Section 6

section 42

section 42

Bishen Narain

March 8, 19 5 7

s. 36

ss. 19 and 20

s. 42

s. 36

s. 36

Section 42

Section 3

ss. 19 and 20

s. 42

s. 36

s. 42

s. 36

ss. 3

s. 42

s. 42

s. 36

ss. 19 and 20

Sections 3

s. 18(c)

Gopal Singh

s. 18(c)

s. 18(c)

s. 18(c)

Art. 3

Art. 31A(l)

s. 18(c)

Wanchoo

Consolidation of Holdings Act

s. 14(1)

s. 18(c)

s. 42

s. 18(c)

Art. 226

November 8,. 1960