G. J. FERNANDEZ v.

STATE OF MYSORE & ORS.

April 14, 1967

[K. N. WANCHOO, C.J., V. BHARGAVA AND G. K. MITTER, JJ.] 8 Constitution of India, 1950, Arts. 14 and 162-Article 162, If confers power on State Government to make rules-Ad1ninirtrative instructions-Effect of violalion.

Sealed tenders were submitted to the Chief En.11ineer of the P.W.D. of the respondent.State for a certain construction. The tender submitted by the appellant was the !Qwest unconditional tender, whreas that of the i.1ird respondent, though lower in amount was a conditional tender. None C of the tenders was accepted by the Chief Engineer. Instead, he wrote to the third respondent asking him if be would withdraw bis conditions, unri wrote to the other tenderers asking them if they would undennke the work at the lowest amount, that is the amount tendered by the third respondent. The replies were to he submitted within a week of the receipt of the letters bv the tenderers but the third respondent submitted his reply.: withdrawing bis conditions, befond that time. The appellant wrote that D his tender being unconditiona should have been accepted.

The Chief Engineer again wrote to the appellant asking him to send a categorical reply and the appellant replied that he was not prepared to reduce the amount. The third respondent wrote thereafter asking for a higher payment, and so, the Major Irrigation Projects Control Board, which was the final accepting authority, directed that fresh negotiations should be opened with all the tenderers. The Chief Engineer therefore again called for renders and wrote to all the tenderers if they were prepared to reduce E the amounts. The appellant did not send any revised quotations but protested against the action taken by the Chief Engineer. As the offers made by the others in their second tenders were not advantageous to the Government, the Chief Engineer called a meeting of all the tenderel" and asked them if they were prepared to make further reductions. The appellant and some other tenderers stated that they had no further reduction to make, two of the tenderers said that they would write later, while the third respondent wrote immediately reducing the amount of F his tender. The Chief Engineer made a report to the Technical Subcommittee which made its recommendations to the Board and the Board accepted the third respondent's firal tender.

The appellant filed a writ petition challenging the grant of the contract to the third respondent on the ground• that : ( 1) the rules in the Mysore Public Works Department Code were not followed; and (2) there was a violation of Art. 14 because, (a) the Chief Engineer accept- G ed the first offer of the third re<nondent hcyond the prescribed period of one week, and (b) the Chief Engineer favoured the third respondent by entering into secret negotiations with him.

The High Court dismissed the petition.

In appeal to this Coun, HELD : (i) There is no statute nor any Article of the Constitution which confers any authority on the State Government to issue rules in H matters with which the Code was concerned. Article 162 of the Constitution only provides that the State Government can take executive action jn all maUers in which the legislature of the State can pass Jaws.

But

the Article by itself does not confer any rule-making power on the State Government. Therefore, the instructions in the Code were mere administrative instructions and even if there was a breach thereof the appellant had no right to apply to the Court for quashing orders in breach of such instructions. [6438-E]

(2) There was no discrimination by the Chief Engineer.

(a) The period of seven days fixed by the Chief Engineer for sendin~ the reply was not a period of limitation, no other tender's reply was reiected on that ground, and even the appellant was given extended time to reply, showing that the period was not meant to be rigid. [644A-C]

(b) There was no evidence of any secret negotiations between the Chief Engineer and the third respondent. [ 6440) ·

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 218 of 1967.

Appeal from the judgment and order dated January 18, 1967 of the Mysore High Court in Writ Petition No. 2426 of 1966.

S. K. Venkatqranga Iyengar, Shyama/a Pappu and Vineet Kumar, for the appellant.

H. R. Gok/1ale, B. R. L. Iyengar, R. H. Dhebar and S. P.

Nayyar, for respondents Nos. I and 2.

The Judgment of the Court was delivered by

Wanchoo, CJ. This is an appeal on a certificate granted by the Mysore High Court and arises in the following circumstances.

Tenders were called for construction of the rtght bank masonary dam called "Hidkal Dam" by t11e Public Works Department, Irrigation Projects, of the State of Mysore.

The tenders were to be submitted to the Chief Engmeer of the department.

Among the tenderers was the appellant.

Another tenderer was respondent No. 3 before us.

Eventually the contract was granted by the Major Irrigation Projects Control Board (hereinafter referred to as the Board) on November 5, 1966 to respondent No. 3.

The appellant ehallenged the grant of con-, tract to respondent No. 3 and prayed for quashing the resolution of the Board mainly on two grounds, namely, (i) that the rules in the Mysore Public Works Department Code (hereinafter referred to as the Code) were no: followed, and (ii) that there was unequal treatment between the various tenderers which was in violation of Art. 14 of the Constitution.

Most of the facts are not in disputi:. and we shall narrate them in some detail as they are necessary for the purpose of determining whether there was any breach of Art. 14 of the Constitution.

A notification was issued on April 4, 1966 for the contract on question calling for sealed tenders, the estimated cost of the contract being 230.44 lakhs. The estimated quantities of several items of work were stated in the tender documents and tenderers were required to quote their rates for various items of work and the amount for each item on the basis of the said estimated quantities.

The notification also said that conditional tenders were liable to be rejected at the discretion of the competent authority without assigning any re; ison therefor.

The notification further said that the competent authority reserved the power to reject all or any of the tenders without assigning any reason therefor.

Nine sealed tenders were received in response to this notification and they were opened on July 30, 1966 in the presence of the tenderers or their representatives.

The appellant's tender was unconditional and was for a tota1 sum of Rs. 2,22. 72 lakhs, this being 3.64 per cent below the estimated <:ost.

Respondent No. 3 made a tender for Rs. 214.58 lakhs i.e. 7.16 per cent below the estimated cost but he had stipulated certain conditions and his rates for excavating soft and hard rock were rather strange. Another tenderer was the National Projects Construction Corporation Limited (hereinafter referred to as the Corporation) and it submitted the tender for Rs. 229.34 lakhs i.e. 0. 7773 per cent below the estimated cost. The Corporation however did not furnish the earnest money demanded and prayed for exemption from such deposit, presumably on the ground that it was a public corporation entirely owned by the Central Government and State Governments. The Corporation also made certain conditions to which it is unnecessary to refer, We also do not think it necessary to refer to other six tenderers in detail.

It is enough to say that five of them had made unconditional tenders while the sixth had made a conditional tender, but the amounts tendered by them were much above the amounts tendered by these three tenderers.

Soon thereafter on August 6, 1966, the appellant addressed a letter to the Chief Engineer saying that his was the lowest unconditional tender and therefore the contract should be granted to him.

The appellant also pointed out in this letter that the tender of respondent No. 3 was conditional and the rates quoted for excavation of soft rock and hard rock were speculative, and therefore, that tender, though it was the lowest in amount should be rejected.

None of these tenders was however accepted.

On August 10, 1966, the Chief Engineer addressed letters to all the nine tenderers enquiring from all of them (except respondent No .. 3) if they would be agreeable to undertake the work for the lowest amount tendered, namely, Rs. 214·58 lakhs.

They , were requested to send their replies within a week and to keep their tenders open till the end of November 1966. It was also made clear in this letter that if no reply was received in time it would be unde.rstood that the tenderer was not prepared

to do the work at the rate indicated. The letter to respondent No. 3 was however different inasmuch as his was the lowest tender and he was merely asked whether he was prepared to withdraw the conditions he had attached to the tender.

The appellant in his reply on August 16, 1966 contended that his tender was the lowest as the tender of respondent No. 3 was liable to be rejected on the ground that it was conditional and that there was no question therefore of asking him to reduce the amount tendered by him to Rs. 214.58 laklJs.

Thereupon he received a letter from the Chief Engineer requesting him again to give a categorical reply whether he was prepared to reduce the amount to Rs. 214.58 lakhs and that this reply should reach the Chief Engineer by August 31, 1966. Respbndent No. 3 received the letter of the Chief Engineer on August 19, 1966 and he should have replied by August 26, 1966 but actually he sent the reply on August 31, 1966 informing the Chief Engineer that he had withdrawn his conditions and requesting that the work might be entrusted to him.

The appellant's reply to the letter of August 25, 1966 was not received by August 31, 1966. It was received on September 10, 1966, and the appellant stated therein that he was not prepared to reduce the amount tendered by him.

We may indicate here that one of the arguments before us is that there was discrimination inasmuch as the Chief Engineer accepted the reply of respondent No. 3 on August 31, 1966 even though it did not come within 7 days as required. It may be added that this point was not apparently taken up before the High Court in this form.

On September 12, 1966, respondent No. 3 wrote a letter to . the Chief Engineer saying that he should be paid rupees seven lakhs more above his tender in view of the fact that the requisite quality of sand was not available at the site and had to be brought from some distance. On September 21, 1966, a meeting of the Board was held and the Board directed that fresh negotiations with all the tenderers should be made to arrive at the rate most favourable to Govern!llent. In consequence of this, letters were addressed to all the nine tenderers by the Chief Engineer on September 27, 1966. In this letter, the Chief Engineer suggested to the nine tenderers whether they were prepared to accept one of two alternatives namely-(i) to limit the overall cost of tender to Rs. 214.58 lakhs and so arrange the internal item rates that they

shuld not be too speculative, i.e., too far above or below the

es~11!Ulted rates in the tender documents, or

(ii) to confirm in wntmg whether the tenderer was prepared to reduce his overall rates by 7 .16 per cent below the estimated rates pro rata on all items and thus bring the tendered amount down to Rs. 214.58 lakhs. The tenderers were also requested to indicate (in case they were , not prepared to reluce the tendered rate by 7 .16 per cent) the highest figure by which they would be prepared to reduce the

rate bdow the estimated cost.

Finally tenderers were requested to submit sealed tenders by October 12, 1966.

On October 4, 1966 the tenderers were infom1¢ that scaled tenders would be -0pened on October 15, 1966.

The appellant did not send revised quotations and protested .against the negotiations sought to be carried on by the Chief Engineer with the tenderers and accused the Chief Engineer of trying to favour respondent No. 3. In that connection the appellant addressed letters to the Chief Minister, the Minister for Public Works, the Chief Secretary to Government and the Secretary to the Government, Public Works Department, complaining that the Chief Engineer was acting contrary to rules and illegally with regard to the appellant's tender and starting negotiations with the tcndercrs.

On October 12, I 966, respondent No. 3 replied that it was extremely difficult for him to re-arrange the internal item rates or to reduce overall rates by a certain percentage, as suggested in .the circular letter, and pleaded that his tender coupled with the withdrawal of conditions might be accepted without modification.

We now come to what happened on October 15, 1966 for the main plank of the appellant in support of his case for contravention of Art. 14 is bused thereon.

The appellant's case is that after the t.znders had been opened on October I 5, 1966, the Chief Engineer carried bn secret negotiations with respondent No. 3 whom he was fa, l/ouring and accpted from him a letter secretly on t)lat date by which respondent No. 3 quoted an overall reduction of 4 per cent below the estimated rates.

The suggestion of the appellant is that this was done to brill)! down the reduction by respondent No. 3 to a little above 3.64 per cent below the estimated cost which was what he had tendered from the very beginning and thus the Chief Engineer 'helped respondent No. 3 to quote rates which became the lowest by a paltry amount and eventually succeeded in getting them approved by the Technical Sub Committee and the Board.

It may be mentioned that before the Board considers any matter, there is a Technical Sub Committee which considers that matter and makes recommendation to the Board which is the final accepting authority subject to confirmation by Government.

Jt may also be mentioned that at one stage in September l 966, the Technical Sub Committee had accepted the tender of the Corporation, but on September 22, 1966 the Board had turned down that tender as it was unduly high and ordered fresh negotiations.

On November 2, 1966 the Chief Engineer made a report which was placed before the . Technical Sub Committee on November 3, 1966. Eventually the. Board accepted the tender of respondent No. 3 at 4 per cent below the estimated cost.

We may indicate here the second ground in support of the contention that there was discrimination and this is based on what happened on October 15, 1966 after the sealed tenders were opened at 4 p.m.

The case of the appellant was that thereafter the Chief Engineer carried on secret negotiations with respondent No. 3 and managed to get from him the letter reducing the rates by 4 per cent below the estimated cost so that his became the lowest tender and that no such opportunity was given to other tenderers. The case of the State on the other hand was that the Chief Engineer called a meeting of all the tenderers at 7 p.m. on October 15, 1966, as in his opinion the offers made in the second tenders were in no way advantageous to Government and had not shown any substantial improvement over the earlier tenders.

At that meeting the Chief Engineer asked all the tenderers if they wanted to make any further reductions or withdraw any condi tions, if so they should immediately give it in writing. Thereupon only two tenderers, namely, the Corporation and one other, said that they would write again while the appellant and five others said

lb.at they had no further reduction to make. Respondent No. 3 immediately thereafter wrote the letter which was. received that very evening stating that he would be prepared to take the contract unconditionally at 4 per cent below the estimated cost. The Chief Engineer also denied that there were any secret negotiations, opened by him with respondent No. 3 on October 15 1966 or that he was favouring respondent No. 3 or that he had not invited all the tenderers to make the reduction if they could.

The grievance of the appellant was that he would have been equally prepared to reduce his tender by the paltry percentage of . 36 per cent and to take the contract at 4 per cent below the estimated cost if that was all thatwas required. But he contended that things were so manipulated in favour of respondent No. 3 that he was eventually granted the tender at only a little less than what the appellant had offered and much above what the respondent No. 3 had originally offered.

So o'! November 14, 1966 the appellant filed the writ petition in the High Court based on the two points already indicated.

The State repudiated both the contentions. The High Court dismissed the petition holding firstly that there was no breach of the conditions of tender contained in the Code, and secondly that there was no discrimination which attracted the application of Art. 14.

The same two contentions have been urged on behalf of the appellant before us. The first is that the way in which tenders were dealt with from July 30, 1966 right up to October 15, 1966 showed that the rules contained in the Code relating to tenders were not followed.

Secondly, it is urged that in any L 1 Sup. C.1./67-1 I

642 SUPllBMB OOUllT llBPORTS

[1967] 3 S.C.R.

case there was discrimination between the appellant and respondent No. 3.

Taking first the contention with respect to the code not being followed in the matter of tenders, the question that arises is whether this Code consists of statutory rules or not. The High Court has observed that the so-called rules in the Code are not framed ei!her under any statutory enactment or under any provision of the Constitution.

They are merely in the nature of administrative instructions for the guidance of the department and have been issued under the executive power of the State. Even after having said so, the High Court has considered whether the instructions in the Code were followed in the present case or not. Before however we consider the question whether instructions in the Code have been followed or not, we have to decide whether these instructions have no statutory force.

If they have no statutory force, they confer no right on any body and a tenderer cannot claim any rights on the basis of these administrative instructions. If these are mere administrative instructions it may be open to Government to take disciplinary action against its servants who do not follow these instructions but non-observance of such administrative instructions does not in our opinion confer any

right on any member of the public like a tenderer to ask for a writ against Government by a petition under Art. 226.

The matter may be different if the instructions contained in the Code are statutory rules. Learned counsel for the appellant is unable to point out any statute under which these instructions in the Code were framed.

He also admits that they are administrative instructions by Government to its servants relating to the Public Works Department.

But his contention is that they are rules issued under Art. 162 of the Constitution.

Now Art. 162 provides that "executive power of a State shall extend to the matters with respect to which the legislature of the State has power to make Jaws".

This Article in our opinion merely indicates the scope of the executive power of the State; it does not eonfer any power on the State Government to issue rules thereunder.

As a matter of fact wherever the Constitution envisages issue of rules it has so provided in specific terms. We may, for example, refer to Art. 309, the proviso to which Jays down in specific terms that the President or the Governor of a State may make rules regulating the recruitment and the conditions of service of persons appointed to services and posts under the Union or the State. We are therefore of opinion that Art. 162 does not confer any power on the State Govemme.nt to frame rules and it only indicates the scope of the executive power of the State.

Of course, under such executive power, the Stae can give administrative instructio11s to its servants ho~ to ac.t m certaiit circumstances; but that will not make such instructions

statutury rules which are justiciable in certain circumstances. In order that such executive instructions have the force of statutory rules it must be shown that they have been issued. either under the authority conferred on the State Government by some statute or under some provision of the Constitution providing therefor.

It is not in dispute that there is no statute which confers any authority on the State Government to issue rules in matters with which the Code is concerned; nor has any provision of the Constitution been pointed out to us under which these instructions can be issued as statutory rules except Art. 162. But as we have already indicated, Art. 162 do.es not confer any authority on the State Government to issue statutory rules. It only provides for the extent and scope of the executive power of the

State Government, and that coincides with the legislative power of the State legislature. Thus under Art. 162, the State Government can take executive action in all matters in which the legislature of the State can pass laws.

But Art. 162 itself does not confer any rule making power on the State Government in that behalf.

We are therefore of opinion that instructions contained in the Code are mere administrative instructions and are not statutory rules. Therefore even if there has been any breach of such executive instructions that does not confer any right on the appellant to apply to the court for quashing orders in breach of such instructions. It is unnecessary for us to decide whether there has been in fact a breach of any instruction contained in the Code with respect to tenders and we do not therefore so decide. But assuming that there has been any breach that is a matter between the State

Government and its servants and the State Government may take disciplinary action against the servant concerned who disobeyed these instructions. But such disobedience did not confer any right on a person like the appellant, to come to court for any relief based on the breach of these instructions. It is for this reason that we are not referring to the Code, though the Hjgh Court did consider whether there was any breach of thse administrative instructions and came to the conclusion that there was no breach.

In the view we take it is unnecessary for us to consider this, for we are of opinion that no claim for any relief before a court of law can be founded by a member of the public, like the appellant, on the breach of mere administrative instructions.

Coming now to the argument under Art. 14, the first con tention is that though seven days' time had expired on August 26, 1966, the Chief Engineer took info account the letter of respnd;-nt o._ 3. which came to him on August31, 1966 and that this 1s d1scnmmatory.

We have already indicated that no such argument was apparently put forward in the High Court; nor do we think that there is any substrum: therein. The seven. days

period given is not a period of limitation and it cannot be said that it was not open to the Chief Engineer to take into account a letter which came a few days later.

There might have been some case of discrimination if at that stage i.e. on August 31, 1966, the Chief Engine.er had rejected any other tenderers reply on the ground that it was beyond seven days or if some one's conditional tender was rejected on the ground that it was not made unconditional by August 31, 1966.

But no such thing happened and therefore there can be no question of discrimination on the ground that the letter of August 31, 1966 written by respondent No. 3 was acted upon by the Chief Engineer.

Besides, it appears that in a letter dated August 25, 1966 the appellant was asked to reply by August 31, 1966 and so it seems th.at the seven days time fixed by the Chief Engineer for reply was not absolutely rigid and that explains why he wrote to the appel~ !ant also to send a final reply by August 31, 1966. We are therefore of opinion that the fact that the Chief Engineer acted on the letter of respondent No. 3 which came to him on August 31, 1966 cannot be said to amount to discrimination.

The other discrimination alleged is about what happened on October 15, 1966. The case of the appellant is that some negotiations were carried. on by the Chief Engineer with respondent No. 3 alone after sealed tenders were opened at 4 p.m. on October 15, 1966. But the Chief Engineer has clearly denied that and his care is that all the tenderers were called by him at 7 p.m. and he asked them all whether they were prepared to make any further reduction. His case further is that six of them were not prepared to make any change while two said that they would send a reply

later.

His case further is that respondent No. 3 sent a letter the same day reducing the rates 4 per cent below the estimated cost The High Court has accepted the Chief Engineer's version. The

appelant does not deny that there was a meeting with the Chief Engineer after the tenders were opened at 4 p.m. on October 15,

1966. His first affidavit on this point was vague and it was only in the reply affidavit that he stated that the Chief Engineer had not asked all the tenderers whether they would be prepared t() reduce rates further or withdraw conditions. Nothing has been brought to our notice which would induce us to disagree with the view taken by the High Court, namely, that the Chief Engineer's assertion that he asked all the tenderers whether they were prepared to make any further reductions or withdraw ariy conditions is correct If that is so-and we have no difficulty in accepting the Chief Engineer's assertion in that behalf-there is no question of discrimination in connection with what happened on October 15, 1966.

The appeal therefore fails and is hereby dismissed with costs.

V.P.S.

Appeal dismissed.

G. J. FERNANDEZ

STATE OF MYSORE & ORS

April 14, 1967

K. N. WANCHOO, C.J.

V. BHARGAVA

G. K. MITTER, JJ.

Constitution of India

Arts. 14 and 162

Article 162

Art. 14

Article 162

Mysore High Court

S. K. Venkatqranga Iyengar

Shyama/a Pappu

Vineet Kumar

H. R. Gok/1ale

B. R. L. Iyengar

R. H. Dhebar

S. P.

Nayyar

Wanchoo

State of Mysore

Major Irrigation Projects Control Board

November 5, 1966

Art. 14

Art. 14

April 4, 1966

July 30, 1966

Central Government

August 6, 1966

August 10, 1966

August 16, 1966

August 31, 1966

August 25, 1966

September 10, 1966

September 12, 1966

September 21, 1966

September 27, 1966

October 12, 1966

October 4, 1966

October 15, 1966

October 12, I 966

Art. 14

October I 5, 1966

September 22, 1966

November 2, 1966

November 3, 1966

October 15 1966

November 14, 1966

Art. 14

Art. 226

Art. 162

Art. 162

Art. 309

Art. 162

Art. 162

Art. 162

Art. 162

Art. 162

Art. 14

August 26, 1966

August31, 1966

October 15,

1966


STATE OF MADRAS v.

R. NAJ."ID LAL & CO.

April 14, 1967

[J. C. SHAH, S. M. SIKRI AND V. R.AMASWAM!, JJ.]

Central Sales Tax Act, 1956, s. 8(4)-Form 'C' as prescribed by Central Government to be filled by purchasing dealer for selling dealer to get benefit of lower rate under s. 8(1)(b)-Central Sales Tax (Madras) Rules, 1951 Rle 10(1) requiring each declaration in 'J!'orm 'C' to contain one transaction only-Sale by Madras dealer to Pun1ab dealer-- Punjab dealer declaring more than one transaction In one form-Whether contravenes Rule 10(1)-State Government does not have power wukr s. 13(3) ands. 13(4) (e) of the Cenlral Act to place such restriction on outside deale1'-Deslrabillty of Central Government making rules uruler s. 13 (1 )(d) in this regard.

The assessee firm was a 'dealer' in Madras State. For the year 1959-60 the firm was taxed at 7% on certain sales effected to registered dealers in the Punjab on the ground that the declaratfons taken from dealers in Punjab in Form 'C' were not in accordanee with r. 10(1) of the Central Sales Tax (Madras) Rules, 1957. The latter rule required that there must be a separate declaration in respect of each transaction whereas the declarations in the present case were in respect of several transactions each. The appellant firm claimed that on the turnover in 9uestion it should have been a"essed at one per cent only, as laid down

Ill s. 8(1) of the Central Sales Tax Act, 1956. The claun was turned down by the Sales-tax Authorities and the Tribunal, but the High Court held that r. 10(1) of the Central Sales Tax (Madras) Rules, 1957 applied only to transactions of purchase by a dealer in the State of Madras and not to the purchasing dealer in the State Of Punjab, that the Madras

State was incompetent to frame rules governing the conduct of the JIU!- chasing dealers in the Punjab, and that in any event r. 10(1) was dtrectory and not mandatory. The State appealed.

HELD: (i) Ex facie r. 10(1) imposes no obligation upon a dealer m the State of Madras wishing to sell goods : It applies to a clear wishing

''? purchase _goods from another dealer. The High Court was fUrther right m holdmg that under the scheine of the Central Sales Tax Act and the . Rules framed under that Act by the State of Madras the injunction agamst the J>Urchasing dealers in r. 10(1) did not apply to dealers in the State of Pun1ab. [650B-651A]

Acordingly the proviso to r. 10(1) which directs that no single declarat10n shall covr '!'Ore than one ln!DSaction of sale except in certain cases has no apphcatton to a purchasmg dealer outside the State of Madras. Nor does r. 10(2) impose any binding obligation upon the selling dealer in Madras to obtain a separate declaration form in respect of each sale transaction. [ 651 C-F]

The appellants were therefore to be taxed at the rate of one per cent and not seven per cent on the turnover in question.

(ii) A rule prescribing that a declaration by a purchasing dealer shall (!fl contam more than one transaction can only be made by the Central overnment under s. 13(l)(d) and the State Governments do not have

SUPREME COURT REPORTS

[1967] 3 S.C.R.

power under s. 13(3) and s. 13(4) (e) to make any such rule.

The ft,. situation which had arisen in this case could have been avoided if instead of each State making its rules requiring that no single declaration shall cover rnol'le than one transaction, the Central Government in exercise of the power under s. 13(1) (d) of the Act had made the rule.

[6510-H; 652A-Bl

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 604 of 1966.

Appeal by special leave from the judgment and order dated August 5, 1964 of the Madras High Court in Tax Case No. 131 of 1963 (Revision No. 87).

G. Ramanujam and A. V. Rangam, for the appellant.

K. Srinivasan and R. Gopalakrishnan, for the respondent.

The Judgment of the Court was delivered by Shah, J.

M/s. R. Nand Lal & Company-hereinafter called 'the assessee'-are dealers in wool at Vaniyambadi in North Arcot District in the State of Madras. In proceedings for assess ment of sales-tax for the year 1959-60 the assessees were assessed to pay tax at the rate of seven per cent. on a turnover of Rs. 2,08,343-05 from sales effected by them to certain registered dealers in the State of Punjab. The assessing authority declined to assess the turnover at one per cent. as prescribed by s. 8 ( 1) of the Central Sales Tax Act, 1956, because in his view the assessees

had submitted declarations in Form 'C' covering two or more transactions contrary to the first proviso tor. 10(1_) of the Central E Sales Tax (Madras) Rules, 1957. The Appellate Assistant Commissioner and the Sales Tax Appellate Tribunal, Madras confirmed the order of the assessing authority. The High Court of Madras, in exercise of its revisional jurisdiction, set aside the order of the Sales Tax Appellate Tribunal, and declared that the assessees were liable to pay tax on the turnover in dispute at the lower rate. The State of Madras has appealed to this Court with special leave.

Section 8 of the Central Sales. Tax Act, 1956 (as amended by Act 31 of 1958) insofar as it is material provided :

"(1) Every dealer, who in the course of inter-State trade or commerce--

(a)

(b) sells to a registered dealer c;>ter than the Goyernment goods of the description referred to in sub-section ( 3) ; shall be liable to pay tax under this Act, which shall be one per cent. of his turnover. ( 2) The tax payable by any dealer on his turnover in so far as the turnover or any part thereof relates to the sale of goods

A in the course of inter-State trade or commer4:e not falling within sub-section (1 )-

(a)

(b) in the case of goods other than declared goods, shall .be calculated at the rate of seven per cent. or at the rate applicable to the sale or purchase of such goods inside the appropriate State, whichever is higher;

(2A) . (3) . " ( 4) The po visions of sub-section ( 1 ) shall not apply to any sale in the course of r.State trade or commerce unless the dealer selling the oods furnishes to the prescribed authority in the prescribed manner- ( a) a declaration duly filed and signed by the registered dealer to whom the goods are sold containing the prescribed particulars in a prescribed form obtained from the prescribed authority; or

(b) (5) .• " ..

It is common ground that the turnover was in respect of goods E of the class specified in the certificate of registration of the registered dealer purchasing the goods as being intended for resale by him or for use by him in the process of manufacture of goods for sale. A registered dealer selling goods in the course of inter.State trade or commerce of the description referred to in sub-s. ( 3) is liable under s. 8 (1) of the Central Sales Tax Act, to pay .tax only r at the rate of one per cent. on his turnover. But to qualify him• self for that rate of tax he has to furnish to the prescn'bed authority a declaration duly filled and signed by the Tegistered dealer to whom the goods are sold. Such a declaration must contain the prescribed particulars in the prescribed form obtained from the prescribed authority. If the selling dealer fails to furnish the G declaration in the prescribed form, he is liable to pay tax at the higher rate mentioned in sub-s. (2)(b) of s. 8.

The respondents did furnish declarations in Form 'C' prescribed under the Rules framed by the Central Government in exercise of the powers ve&ted bys. 13 (1) (d) of the Central Sales Tax Act. But each such declaration covered more transactions of

8 sale than one and the aggregate value of the transactions record• ed in each declaration exceeded Rs. 5,000/- The sales-tax authorities and the Tribunal were of the view that these declara

lions contravened the express direction of the rule made by

SUPRBMB COURT RBPORTS

(1967] 3.S.C.R.

the Madras State in exercise of the wers under s. 13(4)(e) of the Central Sales Tax Act. The Htgh Court held that r. 10(1) of the Central Sales Tax (Madras) Rules, 1957, applied orily to a transaction of purchase by a dealer in the State of Madras, and not to the purchasing dealer in the State of PU!!jab; that the Madras State was incompetent to frame rules governing the conduct of the purchasing dealers in the Punjab; that since the corresponding rules framed by the State of Punjab under s. 13 ( 4) ( e) of the Central Sales Tax Act did not include a provision requiring separate form to be used for each sale transaction, the purchasing dealers were not obliged to comply with r. 10(1) of the Madras Rules, and that since the Madras selling dealers could not compel the purchasing dealers to comply with the rules relating to furnishing of separate declaration forms ordained by the Madras Rules, the declarations were not defective. In any event, the High Court held, r. 10 (1 ) of the Madras Rules was directory and not mandatory.

The assumption made by the High Court that no rule was framed by the State of Punjab under s. 13 ( 4 )_ ( e) f the Central

Sales Tax Act requiring tho purchasing dealers in the State of Punjab to issue a separate declaration form in respect of each individual transaction is erroneous. It is conceded before us that the Punjab Government had in purported, exercise of the powers under sub-ss. (3) & (4) of s. 13 of the Central Sales Tax, 1956, made r. 7(2-A) with effect from February 17, 1958 that:

"No single declaration in Form 'C' prescribed under the Central Sale<> Tax (Registration and Turnover) Rules, 1957, shall cover more thart one transaction of sale except when the total amount of sales does not exceed five thousand rupees."

But, for reasons which we will presently set out, the judgment of r the High Court must still be affirmed.

Subcsection ( 4) of s. 8 of the Central Sales Tax Act provides that in order to qualify himself for the lower rate of tax in respect of sales in. the course of inter-State trade or commerce, the dealer selling goods has to furnish to the prescribed authority in the prescribed manner a declaration duly filled and sign~ by G the registered dealer to whom the goods are sold. The expressions

"prescribed authority" and "prescribed manner" mean the authority and manner prescribed by rules under the Act. Section 13 (1) of the Central Sale~ Tax Act, 1956, authorises the Central Government to make rules, providing, inter alia, the !orm in whch and the particulars to be contained in arty declart10n of cerufiu cate to be given under the Act. By sub-s. (3) .of s. 3 the Stte Government is authorised to make rules not mcons1stent With the provisions of the Act and the rules made under sub-s. ( 1) to

, ,

carry out the purposes of the Act, and by sub-s. ( 4) of s. 13 the State Government Js, iQ. particular and without prejudice to the

powers conferred by sub-s. (3), authorised to mak; e rules for all or any of the purposes set out therein including "the authority from whom, the conditions subjec, t to which and the fees subject to payment of which any form of declaration prescribed under B sub-s. ( 4) of section 8 may be obtained, the manner Jn which the

form. shall be kept in custody and records relating thereto maintained, the manner in which any such form may be used and any such declara, tion may be furnished."

In exercise of the power conferred by s. 13 ( l) ( d) the Central Government has prescribed the form of declaration to be furnish ed by the purchasing dealer under s. 8 ( 4). That is Form 'C'.

The form is in three sections-the "counterfoil", the "duplicate"

and the "original". The "original" contains at the foot of the Form the following Note :-

"(To be furnished to the prescribed authority. in accordance with the rules framed under section 13 ( 4) ( e) by the appropriate State Government.)"

The Madras State Government presuming to act in exercise of

authoty under s. 13(3) and s. 13(4)(e) framed the Central

sates Tax (Madras) Rules, 1957, r. 10(1) of which reads as follows;

"A registered dealer, who wishes to purchase goods from another such dealer on payment of tax at the rate applicable under the Act to sales of goods by one registered dealer to another, for the purpose specified in !he

purchasing dealer's certificate of registration, shall obtain from the assessinii; authority Jn the City of _Madras and the registenng authority af other places a blank declaration form prescribed under rule 12 of the Central Sales T~ (egistration a!1d Turnover) Rules,

195? or furn:shing 1t o the selling dealer.

Before furnish1!1g the declarl\tlon to the selling dealer, the

purcas1!1g dler or any responsible person authorized by hllll: in th1S behalf shall fill in all the required partiulars m the form nd sall also affix his usual signature mthe space proVlded m . the form for this purpose Thereafter, the counterfoil of the form shall be retain: ed by the purchasing dealer and the other two portions marked "original" and "duplicate" shall be made over by him to the selling dealer :

Provided that no single declaration shall cover more than on~ transa.ct!on of sales except-

650 SUPllJIMB COURT llJIPOllTS

(1967) 3 S.C.k.

(a) in cases where the total amount covered by one A. declaration is equal to or Jess than Rs. 5,000 or such other amount as the State Government may, by a general order, notify in the Fort. St.

George Gazette, and (b) " Ex facle, this rule imposes no obligation upon a dealer in the State of Madras wishing to sell goods : it applies to a dealer wishing to purchase goods from another dealer. The argument

that cl. ( 1) of r. 10 is intended to apply to a registered dealer in the. State of Punjab is negatived by the scheme of the Central Sales Tax Act and the Rules framed thereunder. By s. 7 of the Central Sales Tax Act, every dealer liable to pay tax under tho C Ac.t has to make an application for registration under the Act to such authority in the appropriate State as the Central Govern. ment may by seneral order specify. The authority to be specified is designated m the Central Sales Tax (Registration and Tum over) Rules, 1957, framed by the Central Government under s. 13 ( 1 ) , the "notified authority" : vlde r. 2 ( c). Rule 3 provide11 D that an application for registration under s. 7 shall be made by a dealer to , the notified authority in Fonn 'A'. In exercise of the powers conferred by sub-s. ( 1) of s. 7 of the Central Sales Tax Act,.1956, the Central Government issued a notification No. S.R.O.

643 dated February 22, 1957, specifying the persons mentioned in Col. ( 3) of the Schedule thereto as the authorities to whom the

dealer~ of the description in C-0L (2) shall make the application for registration. Item 1 of the Schedule requires a dealer having a singfe place of business in a S'ate to make an application to the authority competent to register him under the general sales tax law of the State if he were liable to be So registered : and item 2 provides that .the dealer having more than one place of business in a State shall make an application to the authority competent to register him in respect of the principal place o1 business under the general sales tax Jaw of the State if he were liable to be so regis!ered. A registered dealer contemplated by r. lO is therefore registered in . the State where he has his place of 'business.

G The expression "assessing authority" is defined in the Central Sales Tax (Madras) Rules; 1957, as meaning any person authorized by the s•ate Government to make any assessment under the Maaras General Sales Tax Act, 1959 (Madras Act 1 of 1959). The dealer has again to obtain the form of declaration from • t¥ assessing authority in the State of Madras. These are clear 1ndi- . cations that the rules framed by the Madras Government were

intended to apply to dealers within . the Stat~ of adras. ":he . H High Court was, in our judgment, nght m holdmg that under the scheme of the Central Sales Tax Act an~. the Rules framed under that Act by the State of Madras, the m1unc-

A tion against the purchasing dealers in r. 10( 1) did not apply to dealers in the State of Punjab. It is unnecessary on rhat view to express any opinion on the question whether the State Govvernment could, in exer<:ise of the powers under s. 13 ( 4), impose upon dealers not within the State, obligations to comply with conditions relating to the contents of the 'C' Form declara- B tions.

Since, r. 10( 1) requiring , that a separate declaration form in respect of each individual transaction shall be furnished was intended only to apply to dealers in the State of Madras, and not to dealers outside the State, proviso to r. 10( 1) which directs that no single declaration shall cover more than one c transaction of sale except in certain cases has no application to. a purchasins dealer outside the State of Madras.

Rule 10(2)

provides:

"A registered dealer who claims to have made a sale to another registered dealer shall, in respect of such claim attach to his return in Form I the portion marked "original" of the declaration received by him from the purchasing dealer. nie assessing authority may, in its discretion, also direct the selling .dealer to pro duce for inspection the portion of the declaration marked "duplicate". " But this rule does not direct that a declaration covering more E than one transaction of sale shall not be given. The rules fram- '

ed by the Madras Government do not otherwise impose any binding obligation upon the selling dealer in the State of Madras to obtain a separate declaration form in respect of each sale transaction, nor do the rules visit him with a penalty on failure to comply with the requirement. '

We are constrained to observe that the rule making authorities have failed to appreciate the scheme of s. 13 of the Central Sales Tax Act. We are of the ?, Pinion that it was not within the competence of the State authorities under s. 13 ( 3) & ( 4) of the central Sa, Jes Tax Act to provide that a single declaration covering more than one transaction shall not be made. Authority to prescribe such an injunction cannot have its source in s. 13 ( 3) or s. 13 ( 4 )( e) : it can only be in the authority conferred by cl. ( d) of s. 13 ( 1 ) by the Central Government. The Central Government has, in exercise of the power under s. 13 ( 1 )( d) prescribed' the fonl?- of declaration and the particulars to be conWned in the

ecl8!'•tton. A directio~ a! there shall !'e a separate declara,.

H ti:>n m pect of, each individual transaction may appropriately be made m exercise of the power coriferred undet s. 13 (1 ) ( d) ..

The State Go\oernment is undoubtedly empowered to make rules under sub-ss. (3) and (4) of s. 13: but the rules made by the

•652 SUPllBMB COUllT llEPOllTS [1967J 3 s.c.ll.

.State Government must not be inconsistent with the provisions of the Act and the rules made under sub-s. ( 1) of s. 13 to carry out .the purposes of the Act. If the .authority to make a rule pres- .cribmg that the declaration shall not contain more than one transaction can be made only under s. 13(l)(d), the State Government cannot exercise that authority. The situation which has arisen in this case could have been avoided, if instead of each State making its rules requiring that no single declaration shall cover more than one transaction, the Central Government in exercise of the power under s. 13 (1 )( d) of the Act had made the rules.

The appeal fails and is dismissed with costs. o.c.

Appeal dismissed.

STATE OF MADRAS

April 14, 1967

C. SHAH

S. M. SIKRI

Central Sales Tax Act, 1956

s. 8(4)

s. 8(1)(b)

s. 13(3)

Central Government

s. 13

Madras

Punjab

s. 8(1)

Central Sales Tax Act, 1956

Central Sales Tax Act

s. 13(l)(d)

s. 13(3)

s. 13(4)

s. 13(1)

CIVIL APPELLATE JURISDICTION

Madras High Court

G. Ramanujam

A. V. Rangam

K. Srinivasan

R. Gopalakrishnan

Shah

R. Nand Lal & Co

s. 8

Central Sales Tax Act, 1956

High Court of Madras

Sales Tax Appellate Tribunal

State of Madras

Section 8

Tax Act, 1956

s. 8

Central Sales Tax Act

s. 8

Central Sales Tax Act

s. 13(4)(e)

Central Sales Tax Act

State of Punjab

s. 13

Central Sales Tax Act

s. 13

Punjab Government

s. 13

February 17, 1958

s. 8

Central Sales Tax Act

Section 13

Tax Act, 1956

s. 3

s. 13

section 8

s. 13

s. 8

section 13

Madras State Government

s. 13(3)

s. 13(4)(e)

s. 7

Central Sales Tax Act

s. 13

s. 7

s. 7

Central Sales Tax Act

February 22, 1957

Madras Government

Central Sales Tax Act

s. 13

s. 13

Central Sales Tax Act

s. 13

Jes Tax Act

s. 13

s. 13

s. 13

s. 13

s. 13

s. 13

s. 13

s. 13(l)(d)

s. 13


T. N. K. GOVINDARAJULU CHETTY

COMMISSIONER OF INCOME TAX, MADRAS April 17, 1967

B [J. C. SHAH, S. M. SIKRI AND V. R.AMAsWAMI, JJ.)

Income-tax Act, 1922(11 of 1922)-Interest on compensatwn for property acquired-If taxable.

The assessees were offered compensation and interest on the ainount of compensation in respect of their property which was first requisitioned under r, 75A of the Defence of India Act, 1939 and later acquired by the State under. s. S of the Requisitioned Land (Continuance of Powers) Act. The Requisition Act provided that compensation payable shall be determined in accordance with the provisions of s. 19 of the Defence of India Act and the rules thereunder, but neither s. 19 nor the Rules. provided that interes1 shall be paid on the amount of compensation. The assessee demanded more compensation and interest, and, the High Court in appeal enhanced the compensation and awarded interest on it. The Revenue assessed to income-tax the amount of interest, which was upheld, in reference, by the High Court. In appeal, this Court.

HELD : Interest received by tho asscssee was taxable.

If the source of the obligation imposed by the statute to pay interest arises became the claimant is kept out of his money, the interest received is chargeable to tax as income. The same principle would apply if interet is payable under. the terms of an agreemenr and the court or the arbitrator gives efiect to the terms of the agreement-express or impliedand awards interest which has been agreed to be paid. Clauses (a) to. (fl of s. 19(1) of the Defence of India Act are a Code relatin~ to a arbitration in determinin(! the compensation payable to a pel'SOll deprived of his property. Provisions relating to payment of interest, are not, however, part of the law relating tc> arbitration and there is nothing in

cl. (g) which excludes the application of the suootantive Jaw relating to payment of interest when the arbitration is determining the amount of compensatron.

In this case, the right to interest arose by virtue of the provisions of Ss. 28 and 34 of the Land Acquisition Act, 1894, and the arbitrator and the High Court merely gave effect to that right in awarding interest on the account of compensation. (658 E-F; 660 D-Hl

Dr. Shamlal Narula v. Commisslon•r of Income-tax, Punjab, Jamnu1. and Kashmir, Himachal Pradesh and Patiala, 53 I.T.R. 151, and Satlnd•r Singh & Ors. v. Amrao Singh & Ors" JI961] 3 S.C.R, 676, followed.

The Cominissioners of Inland Rev•nu• v. B•llantine, 8 T.C. 595, and Simpson (H. M. Inspector of Taxes) v. Executors of Bonner Maaric• as Executor of Edward Kay, 14 T.C. 580, distinguished, Crv!L APPELLATE JURISDICTION: Civil Appeals Nos. 1425 and 1426 of 1966.

Appeals by special leave from the judgment and order dated October 29, 1962 of the Madras High Court in Tax Case No. 195 of 1960.

S. Swaminathan and R. Gopalokr/shnan, for the appellant (ino both the appeals).

654 SUPll.IMll COU1T UPOJlTS

(1967) 3 s.c.R.

T. V. Yiswanatha Iyer, T. A. Ramachandran, S. P. Nayyar for R. N. Sachthey, for the respondent (in both the appeals).

The J.udgment of the Court was delivered by Shah, J, The Income-tax Appellate Tribunal submitted two , questions for the opinion of the High Court of Madras :

"1. Whether the sum of Rs. 1,28,716/- is assessable as income under any of the provisions of the. Act 1

2. If the answer is in the affirmative, the assessment years in which' the amount falls to be assessed by suitable apportionment." The first question was answered by the High Court in the affirma tive.

The High Court declined to answer the second question because it did l; IOt, in their view, arise out of the order of the Tribunal. The assessees have appealed to this Court.

, .By order dated January 30, 1944, the Cgllector of Madras, exercising power under r. 75A of the Defence of India Rules, 1939, requisitioned a property known as "Lutterals Gardens" belonging to tr; assessees. The property continued to remain under requisi tiojlill it vested in the Government of Madras absolutely in conseqitence of an order made on May 24, 1949 by the Collector of .Madras under s. 5 of the Requisitioned Land (Continuance of Powers) Act, 194 7, declaring the intention of the Government of Madras to acquire that property. The assessees declined the offer made by the Collector to pay Rs. 2,40,000/- as compensation for acquisition of the property and interest.at the rate of 6% thereon . from the date of notification for acquisition, and the dispute relating . to compensation payable to the assessees was referred to the Chief Judge of .the Court of Small Causes,, Madras. By order of the High Court of Madras in appeal from the order of the Chief Judge it was adjudged that the assessees be paid Rs. 5,00,000/- as compensation for the property. The High Court also awarded interest at the rate of 6% on the amount of compensation from the date of notification for acquisition.

During the two previous years corresponding to the assessment years 1955-56 and 1956-57 the assessees received, pursuant to the order of the High Court, a total sum of Rs. 6,28,716/-. In ptoceedings for assessment of tax for the assessment years 1955-56 and 1956-57, the Income-tax Officer apportioned the amount of Rs. 1,28,716/- on the basis of actual receipts in the two previous years and assessed the amounts so apportioned to income-tax, The Appellate Assistant Commissioner held that the apportioned amounts were of the nature of revenue and not capital receipts. but in his view the income received was liable to be calculated on accrual basis year after year from the date of the notification for acquisition and on that account the assessments of the previous years f~ 1950·51 to 1954·55 should be reopened and the inte rest which accrued in those years should be assessed.

The Commissioner of Income-tax and the assessees appealed to the Appellate Tribunal against the ordr of the Appellate Assis tant Commissioner. The assessees submitted that Rs. 1,28,716/· received as interest being part of compensation were not assessable to tax whereas the Commissioner claimed that the Income-tax Office; was justified in assessing the amounts in the years in which they were received. The Income-tax Appellate Tribunal accepted the contention of the assessees that the receipts were not assessable to tax because they were of the nature of capital receipts. At the instance of the Commissioner, the Tribunal referred the two ques tions set out here-in-before.

Section 5 of the Requisitioned Land (Continuance of Powers) Act, 1947 authorises the Government by which or under the autho rity of which land has been requisitioned, to acquire the land subject to requisition, by publishing a notice to the effect that the D Government has decided to acquire such land. Section 6 of the Act provides, inter alla, that compensation payable to the owner of the land shall be determined in accordance with the provisions of s. 19 of the Defence of India Act, 1939, and the rules made there under. Section 19 of the Defence of India Act, 1939, sets out the principles for determining the compensation payable to a claimant. The amount of compensation may be fixed by agreement between the owner and the Government : where no such agree- E

ment is reached the Central Government is enjoined to appoint an arbitrator having the qualifications rescribed therein. Under s. 19 (1) ( e) the arbitrator in making his award must have regard, inter a/ia, to the provisiop.s of sub-s. ( 1) of s. 23 of the I.and Acquisition Act, 1894 in so far as the same can be made applicable.

An appeal lies against the award of the arbitrator to the High Court. Sub-sections (2) and (3) of s. 19 confer upon the Cen. tral Government authority to frame rules for the purpose of carrying into effect the provisions of s. 19. In exercise of that power, the Government of India framed "The Defence of India (Payment of Compensation and Arbitration) Rules, 1943" which amongst G other provisions directed that the Collector shall pay compensation as soon as may be practicable. But neither s. 19 ( 1) of the Defence of India Act, nor the Rules framed under s. 19(2 ). and

(3) provide that intetest shall be paid on the amount of compen• sation. In the present case, interest was, however offered to be paid by the Collector; .and the High Court also aarded interest on the amount of compensation from the date of the notification of acquisition.

It was held by this Court in Dr. Shamlal Narula v. Commissioner of Income-tax, Punjab, Jammu and Kashmir, Himachal

SUPREME COURT REPORTS

(1967] 3 S:C.R

Pradesh and Patiala(') that the statutory interest paid under s. 34 of the Land Acquisition Act, 1894, on the amount of compensa• tion awarded from. the date on which the Collector has taken possession of land compulsorily acquired under the Land Acquisition Act, 1894, is interest paid for delayed payment of the compensation and is a revenue receipt liable to tax under the Income-tax Act.

It was observed in that case at p. 156 :

". . . . . interest, whether it is statutory or contractual, represents the profit the creditor might have made if he had the use of the money or the loss he suffered because he had not that use. It is something in addition to the capital amount, though it arises out of it. Under section 34 of the Act when the legislature designedly used the word "interest" in contradistinction to the amount awarded, we do npt see any reason why the expression should not be given the natural meaning it bears.

The scheme of the Act and the express provisions thereof establish that the statutory interest payable under section 34 is not compensation paid to the owner for depriving him of his right to possession of the land acquired, but that given to him for the deprivation of .the use of the money representing the compensation for the land acquired."

Counsel for the assessee however contended that the principle of Dr. Shamkll Narula's case(') is not applicable to this case, since there is no provision in the Requisitioned Land (Continuance of Powers) Act, 1947 and the Defence of India Act, 1939, and the rules framed thereunder for payment of interest on the amount of compensation. Counsel said that under the Act, the owner is paid not the market value of the property, but compensation determined in accordance with a highly artificia I scheme, and that the interest paid, in truth, bears the same quality as oompensation for deprivation of property and is on that account a caoital receint not exigible to tax. In suooort of his contention, counsel invited our attention to two decisions : The Commissioners of lnla11d Reve,.ue

v. Ballantine(") and Simpson (H.M. Inspector of Taxes) v. Exe- ·

cutors of Bonner Maurice as Executor of Edward Kay(8).

Jn Baltantine's case(2 ) a claim of a firm of contractors against a railway company for "additional costs, loss and damage" was referred to arbitration. The arbitrator awarded to the claimant a sum of money mainly as damages, together with interest thereon at 5 per cent. per annum from the date of lod1?111ent of claim until payment. The Revenue sought to charge the interest paid bv the

(l) 531.T.lt. ISi.

(2) 8 T.C. S9S. (3l 14 T, C, S8 '.

A . railway company to tax under Case Ill of Sch. D of the Income

tax Act, 1918. It was held that the sum added in the name of interest was part of damages, and was not "interest of mney" chargeable to income-tax under Case Ill of Sch. D. Lord President Clyde observed :

"Now it is familiar that an assessment of the kind may contain as one of its constituent elements an allowance in respect that the claimant has lain for a long time out of his remedy.

The propriety of such an allowance may depend on the character of the claim, and its amount may depend on many considerations of which time is only one.

But an interest calculation is a natural and legitimate guide to be used by an arbiter in arriving at what he thinks would be a fair amount. In most cases in which such an allowance is a constituent of an award it does not separately appear, but is slumped along with other elements in the gross sum decetned for; but there is nothing to prevent an arbiter, if he thinks it just and reasonable in a particular case, to make the allowance in the form of an actual interest calculation from a past date until the sum fixed as at that date is paid. In all such cases, however-whether the allowance is wrapped up in a slump award or is separately stated in the decree-the interest calculation is used in modum aestimationis only The interest is such merely in name, for it truly constitutes tlJitt part of the compensation decerned for which is attributable to the fact that the claimant has been kept out of his due for a long period of time. It is not therefore "interest of money" chargeable under Case III of Schedule D."

In Simpson v. Executors of Bonner Maurice as Executor of Edward Kay(') the executors of Kay, a naturalised British subject, who died during the First World War received, as the result of the peace treaty claims, amounts representing partly capital of securities, st?cks and sha!e.s in Banks in Germany deposited by Kay; partly mterest and d1v1dends; and partly compensation under the Peace Treaty. In a proceeding for assessment of the receipt

o tax it was held. that the compensation computed on the basis of mterest was not mcome for the purposes of income-tax.

Lord Hanworth, M. R., observed at p. 601 :

"I want to add now one more word in reference to the sum which has been paid by way of compensation under Article 297. It is said in reference to that 'that, at least, arose at the time when it was paid under the order of the Mixed Arbitral Tribunal'.

It was a sum

(1) 14 T.C. 580.

L7Sup.CJ/67-12

H58 SUPREME OOUJ.T llEPOllTS [1967] 3 s.c.~

which was calculated as interest"-. . . 'and it is interest, and therefore it is within the words of the Schedule, which undoubtedly impose a tax upon interest which arises or accrues to a person liable to tax.' But is it interest 'I Is that its quality, or is it compensation estimated and measured in terms of interest? It appears to me quite clear that, apart from Article 297, no such sum could have been recovered."

L:1wrence, L.J., observed at p. 605 :

"Neither the fact that the compensation was mea sured by the amount of the interest, which but for the embargo placed upon the money by the German Government could have been earned by the Respondents, nor the fact that part of the compensation was described as "interest" in the decision of the Mixed Arbitral Tribunal, in my judgment, has the effect of altering the character of the compensation paid to the Respondents."

But it must be noticed that liability to pay interest arose in lla/lantine's case(') under the award of the arbitrator and in the Executors of Bonner Maurlce as Executor of Edwad Kay's case( 2 ) under the order of the Mixed Arbitra\ Tribunal, and in each case it was he.Id that what was paid, though called "interest'', wa~ in truth compensation for loss suffered on account of deprivation of property.

According to the view taken by this Court in Dr.

Sham/al Namla's case( 8), if the course of the obligation imposed by the statute to pay interest arises because the claimant i~ kept out of his money, the interest received is chargeable to ta'!; as income.

The same principle would apply if interest is payable under the tenns of an agreement and the Court or the arbitrator gives effect to the terms of the agreement-express or implied-- and awards interest which has been agreed to be paid.

It is therefore necessary to determine whether the obligation to pay interest awarded under the order of the High Court of Madras arose out of the statute or out of the award. In Satinder Singh & Ors. v. A mrao Singh and Ors.(') lands forming part of Cis..Sutlej Jagir were compulsorily acquired under the East Punjab Acquisition and Requisition of Immovable Property (Temporary Powers) Act, 1948.

The claimants to the lands claimed in addition to statutory compensation interest from the date from which they were dispossessed and till the date of payment of compensation.

The arbitrator appointed under the Act awarded interest on the amount of compensation and the Hi, l!h Court of Punjab in appeal confirmed the order. This Court held that the claimants were

·-. ~· -·· ..... (ll 8 T.C. 595.

(2) 14 T.C. 580.

(3) 53 l.T.R. 151

(4) (1961] 3 S.C R. 676.

entitled to interest on the compensation amount from the date of dispossession till the date on which 'the amount of compensation was paid to the claimants. Section 5 of the East funjab Acquisition and Requisition of Immovable Property (Temporary Powers) Act, 1948, set out the principles according to which compensation was to be paid in regard to the acquired property, and by cl. ( e) thereof it was provided that the arbitrator in making the award shall have regard to the provisions of sub-s. ( 1) of s. 23 of the Land Acquisition Act, 1894 in so far as the same may be applicable.

The Act contained no express provision for payment of interest on compensation determined by the arbitrator. This Court rejected the contention of the State of Punjab, tha.t ss. 28 and 34 of the Land Acquisition Act which dealt with the payment of interest were not intended to apply to the proceedings before !he arbitrator.

It was observed : "Stated broadly the act of taking possession of immovable property generally implied an agreement to pay interest on the value of the property and it is on this prin ciple that a claim for interest is made against the State." The Court further observed :

"It would thus be noticed that the claim for interest proceeds on the assumption that when the owner of immovable property loses possession of it he is entitled to claim interest in place of right to retain possession. The question which we have to consider is whether the application of this rule is intended to be excluded by the Act of 1948, and as we have already observed, the mere fact that s. 5(e) of the Act makes s. 23(1) of the Land Acquisition Act of 1894 applicable we cannot reasonably infer that the Act intends to exclude the application of this general rule in the matter of the payment of interesr." The Court also observed :

"When a claim for payment of interest is made by a person whose immovable property has been acquired compulsorily he is not making claim for damages properly or technically so called; he is basing his claim on the general rule that if he is deprived of his land he should

e put in possess.ion of compensation immediately; if not, m lieu of possession taken by compulsory acquisition interestshould be paid to him on the said amount of compensation."

The scheme of the East Punjab Acquisition and Requisition of Immovable Property (Temporary Powers) Act, 1948 is similar to the scheme of the Requisitioned Land (Continuance of Powers) }\ct, 194 7. The Court in Satinder Singh' s case(') held that he-

(1)(1961] 3 S.C.R. 676 .. ·-

SUPRBMB COURT RBPORTS (1967] 3 s.c.R.

cause of the injunction expressly to apply the provisions of s. 23(1) of the Land Acquisition Act, 1894, in the determination of compensation, the application of ss. 28 and 34 dealing with the payment of interest on the amount awarded as compensation cannot be deemed excluded. The Court also held that when the owner of property is dispossessed pursuant to an order for compulsory acquisition, an agreement that the acquiring authority will pay interest on the amount of compensation is implied.

The reasoning on which the right of the owner of the lands acquired to interest was affirmed in Satinder Singh's case(1), prima facie, applies in this case. Counsel for the assessees contended that

the application of ss. 28 and 34 of the Land Acquisition Act in proceedings for arbitration under the Requisitioned Lands (Con-

 C tinuance Powers) Act, 1947, was expressly excluded bys .. 19(l)(g) of the Defence of India Act which enacted that :

"Save as provided. in this section and in any rules made thereunder, nothing in any law for the time being in force shall apply to arbitration under this section." But cl. (g) is not susceptible of any such interpretation. Clauses

(a) to (f) of s. 19(1) are a Code relating to arbitration in determining the compensation payable to a person deprived of his property.

Provisions relating to payment of interest are not, however, part of the law relating to arbitration and there is nothing in

cl. (g) which excludes the application of the substantive law relating to payment of interest when the arbitration is determining the amount of compensation.

We are therefore i;>f the view that the principle on which The Commissioners of Inland Revenue v. Ballantine(') and Simpson (H.M. Inspector of Taxes) v. Executors of Bonner Maurice as Executor of Edward Kay(8 ) were based has no application to this case. It may be recalled that in those cases the arbitrator and the Arbitral Tribunal were, in awarding interest, not seeking to give effect to, or to recognize a right to interest, conferred by statute or contract. The source of the right to interest in both the cases did not arise from the statute or agreement. In the case on hand, the right to interest arose by virtue of the provisions of ss. 28 and 34 of the Land Acquisition Act, 1894, and the arbitrator and the High Court merely gave effect to that right in awarding interest on the amount of compensation. Interest received by the assessee was therefore properly held taxable.

The appeals fail and are dismissed with costs. One hearing fee. y, p, Appeals dismissed.

(!) 11961] 3 S.C.R. 676.

(2) 8 T.C. S95.

(3) 14 T.C. 580.

T. N. K. GOVINDARAJULU CHETTY

COMMISSIONER OF INCOME TAX, MADRAS

April 17, 1967

C. SHAH

S. M. SIKRI

Income-tax Act, 1922

Defence of India Act, 1939

s. 19

s. 19

s. 19(1)

Ss. 28 and 34

Land Acquisition Act, 1894

S. Swaminathan

R. Gopalokr

T. V. Yiswanatha Iyer

T. A. Ramachandran

S. P. Nayyar

R. N. Sachthey

Shah

High Court of Madras

January 30, 1944

Madras

Defence of India Rules, 1939

Government of Madras

May 24, 1949

.Madras

s. 5

Court of Small Causes,, Madras

Section 5

Section 6

s. 19

Defence of India Act, 1939

Section 19

Defence of India Act, 1939

Central Government

s. 19

s. 23

Acquisition Act, 1894

s. 19

s. 19

Government of India

s. 19

s. 19(2 )

s. 34

Land Acquisition Act, 1894

Income-tax Act

section 34

section 34

Shamkll Narula

Defence of India Act, 1939

Edward Kay(8

Jn Baltantine

tax Act, 1918

Clyde

Schedule D

Edward Kay

Kay

Germany

Hanworth

Article 297

Article 297

Bonner Maurlce

Edwad Kay

(1961] 3 S.C R. 676

Section 5

s. 23

Land Acquisition Act, 1894

State of Punjab

ss. 28 and 34

s. 5(e)

s. 23(1)

Satinder Singh

(1961] 3 S.C.R. 676

s. 23(1)

Land Acquisition Act, 1894

ss. 28 and 34

ss. 28 and 34

s. 19(1)

ss. 28 and 34

Land Acquisition Act, 1894

1961] 3 S.C.R. 676