K. P. POUI OSE

STATE OF KERALA & ANR.

April 21, 1975

[A. ALAGIRISWAMI, P. N. BHAGWATI AND P. K. GOSWAMI JJ.]

Arbitration Act, s. 30 (a)-Scope of.

For the construction of three overhead reservoirs tenders were invited.

The appellant was the successful tenderc.r for the work. The notification inviting tenders gave a description of the soils at the places of constn(ctions.

Sometime later, however, the Research Institute of the State Government recommended a different mcxie of foundation in respect of one reservoir and the department accordingly gave instruction to the appellant to adopt the: process recommended by the Research Institute.

The appellant executed the- \Vork in accordance with the recommendations of the Research Institute and claimed a higher payment on the ground that the work: done by him 'W3.S not included in the original design because wh_en he submitted his tender he assumed the site conditions to be as represented in the Schedule to the noti~ fication. The Department, having refused the claim, the di.<>pute was referred to Arbitration under cl. 34 of the tender notification. The Chief Engineer who v1as the sole Arbitrator ga.ve a. speaking order based on an exlID.ination of the d0cumcnts.

The High Court. S('t aside the judgment of the Subordin::!tc Judge and resor cd the or(k:· of the Arb!tralor.

On appeal to this Court it was contended that the Arbitrator wa.'i' gullty of legal misconduct in conducting the procecdin2s in that the material documents were absolutely ignored by the Arbitrator, resulting in misc.;'lrria.e of justice.

Allov.'iog the appeal.

HELD : Under s. 30(a) of the Arbitration Act an award can be set aside \Vhen an Arbitrator has misconducted himself .or the proceedings. Misconduct under s. 30(a) has not a connotation of moral lapse. It compri<; es Jegal misconduct which is complete if the Arbitrator on the face of the award arrives at an inconsistent conclusion even on his own finding or arrives at a decision by ignoring very material documents which throw abundant light on the controversy to help a just and fair decision. It is in this sense that the Arbitrator has misconducted the proceedings in thi! case.

Jn the instant case the two documents which \he Arbitrator failed to consider were material docun1ents to arrive at a just and fair decision to resolYe the controversy between the Department and the appellant. In the background of ihc controversy in this case even if the Department did not prcxlucc these documents before the Arbitrator it was incumbent upon him to get hold of all the relevant documents including those two documents for the purpose of a just decision.

The a'vard, therefore, suffers from a manifest error apparent ex facie.

[218ABC]

H Ov1L APPELLATE JURISDICTION Clv1L APPEAL No. 1485 OF 1974

Appeal by special leave from the judgment and decree dated 29-1-73 of the Kerala High Court iu A.S. No. 357 of 1972.

S. V. Gupte, C. J. Ba/akrishna11 and A. S. Nambiar. for the appellant.

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K; P. POULOSJl '" KERAT, A (<Sos\vo111i, J.) 215 .

T. S. Krisf111a111urt/1y Iyer and K. R. Nambiar, for the respondents.

The Judgment of the Court was delivered by

GOSWAMI, J.-This is an appeal by special leave against the judgment of the Kcrala Hig)l Court setting aside the judgment of the Subordinate Judge, Ernakulam .and restoring the award of the Arhi- B trator who had earlier refused th{1 claim of the appellant.

The appellant (briefly the contractor) was a successful tenderer for conmuction af three zonal R.C.C. Overhead Reservoirs, two in Mate.ncherry and one in Cochin, in connection with the Ernakulam Mattencherry Water Supply Scheme.

In the schedule annexed to the noUfication invitin)); tenders under the heading 'Site', it was stated that

"the soil at the site for Reservoir No. 1 and Resetvoir No. 2 is loose clay and for Reservoir No. 3, sandy". The tenderer was to execute an i, grecment on a stamped paper before commencing work. It appears later on the Kerala Engineering Research Institute, Poochi, Soil Mechanics and Foundation Division (briefly the Research Institute) submitted a report (Ext. P. JO dated September 14, 1965) that the sub-soil at the three places chosen as sites for the reservoirs upto 16 m. showed that the top soil was sancl, the middle layer clay, and the bottom layer, silty sand or sand.

It was stated that the clay found at the three places was of a highly compressible nature and hence pile, foundation wa5 preferable and that as the top strata was sandy, jetting had to be resorted to for driving the piles through this strata. After receipt of the opinion of the Research Institute, respondent No. 2 (herein

after to be described as the Department) gave instructions to the con tractor to adopt the process of jetting for driving piles for the tank at Thoppumpady which is .alone in dispute in this case. On October 7. 1965, the Chief Engineer after scrutinising the pile design of the contractor \\Tote ra him, inter alia, as follows :

"The piles as per design submitted with raft like cap may be

adapotcd for tank at Thoppumpady where the length of pile suggested by the research division is in the region of 30 ft . . . . . .. . . ... ... . Jetting has to be resorted to in the top strata where sandy layer is met with .... Your state.ment that piles

of more than 30 ft. length is very difficult to be driven in G Ernakulam is not quite convincing to the Department.

Any how a decision will be taken on this only after ascertaining~ the details regarding the practical difficulties if any from agencies actually engaged in such type of works in the locality.

Meanwhile you may please execute the agreement and H start the work on the Reservoir at Thoppumpady receiving further instructions from Executive Engineer, Public Health,

Alwaye" (Ext. P. I). ,

On February 21, 1966, the contractor wrote to the Executive Engineer informing him that as per instructions of the Research Institute am\

10 SC/75-15.

A site conditions he provided jetting arrangements for dri, ing the piles although the process o:f jetting was not included in his tender.

He enclosed the details of expenditure on that account and mentioned that for the pile casting he used extra reinforcement for additionally strengthening the head of piles due to the site condition. He pointed out that this was not included in his original design.

B The sum and substance Qf the contractor's grievance< was that he assumed the site condition to be as represented in the schedule to the notification inviting tenders and submitted his original design on that bas.is and since, however, the site condition was found to be different and on the advice of the Research Institute jetting had to be resorted to involving extra expenditure be was entitled to claim additional C amount for the work of jetting. The Department, however, refused

 the claim which led to the arbitration under clause 34 of the tender notification. The Arbitrator was the Chief Engineer. It appears tl1e award was based on examination of documents and after heating arguments of the parties.

D The award with which we are concerned is a speaking one a!ld gives the reasons for the decision against the contractor. Mr. Gupte, the learned counsel for the appellant submits that the Arbitrator was guilty of legal misconduct in conducting the proceedings.

He submitted that two very material document_s, Exts. P. l1 and

P. 16, were absolutely ignored by the Arbitrator resulting in miscarriage E of justice. On the other hand. r. Krishnamurthi Iyer submitted that these documents were not even marked before the Arbitrator; they were marked only before the Subordinate Judge.

According to him, therefore, there is no foundation for the grievance.

We have been taken through all the relevant documents by the learned counsel for both sides and we are satisfied that Ext. P. 11 and F Ext. P. 16 are material documents to arrive at a just and fair decision to resolve the controversy. between the Department and the contractor.

Jn the bac!cground of the controversy in this case even if the Department did not produce these documents before the Arbitrator it was incumbent upon him to get hold of all the relevant documents including Exts. P. 11 and P. 16 for the purpose of a just decision. Ext. P. 11 G dated September 8, J 966, is a communication from the Superintending Epgineer to the Chief Engineer with regard to the objections raised by Audit in connection with the construction of the reservoirs.

The following extract will explain the position then taken by the Department:-

"The contention of the Accountant General that jetting was resorted to by the contractor to facilitate the driving of the piles is not correct. Had it not been for jetting, it would not have been possible for the piles to reach the required -depth of 30', passing through sandy strata and we would have been constrained to stop with a smaller depth viz., upto the point of refusal for penetration of the pile by , hammering. It was, therefore, in the interest

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K. iP. POULOSE v. KERALA (Goswami, !.) 217

of the work that jetting was insisted upon by the Depart-

. A mcnt for pile driving.

The contractor had lo resort to jetting under instructions from tbe Departmnt. ·

T)lc Accountant General has stated that the department is not bound to pay extra for adopting the method of jetting for pile drivi11g. This does not appear correct since the method H of jetting was adopted in the interest of the department in view of the sandy stratum obtaining at the site as against the indication given by the department that the soil is clayey upto a depth of nearly 200 ft. No doubt, the contractor was asked to ascertain the nature of the soil; but this docs not imply that he was to conduct exploratory borings to confirm the classification giveli. by the depart- C ment in the tender within the short span of time available for submitting tenders".

Ell!lier also on July 25, 1966, as per Ext. P. 16 the Executive Engineer had written to the Chief Engineer whcrefrom paragraph 4 is revealing : D

"Even though while inviting tenders for the work there was a condilion that the tenderer should examine the soil conc!ition it was not expected of them to do soil testing in detail within the period available to them to tender for the work. A clear indication regarding the nature of the strata that is likely to be met with was also furnished at the time of inviting tenders.

After complete soil investigation the strata was found to be different from that furnished by the department and so in my opinion technical specification has changed.

In the circumstances jetting done by the contractor can be considered as an extra item".

We now come to the Award.

Although the Arbitrator has held that "jetting, however, is not an authorised extra covered by the agreement", he has made the following significant observation which is inconsistent with his conclusion that the contractor has no right for extra payment for the jetting :

"The Chief Engineer has rejected the claims of the contractor on grounds of non-inclusion of this (jetting) in the agreement which was executed subsequent to the direction issued by the department to adopt jetting. The Chief Engineer's decision totally ignores the next sentence in that letter 'Meanwhile you may execnte the agreement'.

By this sentence the issue of extra paylhent for jetting is left open even after the execution of the agreement".

If the above is the conclusion of the Arbitrator, rejection of the claim on the ground that ''jetting, however, is not an authorised extra covered by the agreement" cannot be anything but rationally inconsistent.

The award, therefore, suffers from a manifest error apparent ex facie.

A Under section 30(a) of the Arbitration Act an award can be set aside when an Arbitrator has misconducted himself or the proceedings.

Misconduct under section 30(a) has npt a connotation of moral lapse.

It comprises legal misconduct which is complete if the Arbitrator on the face of the awattl arrives at an inconsistent conclusion even on his own finding or arrives at a decision by ignoring very material B documents which throw abundant light on the controversy to help a just and fair decision. It is in this sense that the Arbitrator has misconducted the proceedings in this case.

We have, therefore, no hesitation in setting aside such an award. "Jn the result the judgment of the High Court is set aside and that of the Subordinate Judge is restored.

The award of the Arbitrator thus stands quas)1ed. The Arbi- C tt11tor will complete the proceedings after considering all the relevant documents including Ext. P. 11 and Ext. P. 16 after giving opportunity to the parties.

The appeal is allowed with costs.

P.B.R.

Appeal allowed.

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OSE

STATE OF KERALA & ANR

A. ALAGIRISWAMI

P. N. BHAGWATI

P. K. GOSWAMI JJ.

s. 30

cl. 34

s. 30(a)

s. 30(a)

clause 34

section 30(a)

section 30(a)


G. V. GUNAYYA CHEITY & ANR

V. DASARATHARAMAJAH & ORS.

April 21, 1975

[A. ALAG!R!SWAM!, P. N. BHAGWAT! AND P. K. GOSWAMI, JJ.) B

A ndhra Pradesh Agricultural Prvduce and Live-Stock Markets Act_. 1966,

cl. (iv) of sub-sec. (1) of sec. 5 and proviso to cl. (ir), and section 7 and 2z.!._tirfarket comniiJtee, constitution of-1Uen1bers . representing traders to be elected, bur they are to be nominated by Govern1nent H1heri 111arket contniittee is constituted for the first thne-1\Tornir.ation of menibers reprcsentin;: tradl?rs to the newlv constituted fnarket cot11111ittee after sttpersession, if - C legal. •

The Governn1ent, by a notificalion issued under sec .. 3, ub-sec. (3) of the Andhra Pradesh Agricnltural Produce and Live-Stock ?lfarkets 1\ct, 1966, declared the area compried in Machilipatnam, Bandar and Divi taluka to be

notified area for the purposes of the Act. Th.is waS .follO\\'ed by a notification dated 30th October, 1969 constih1ting a i\larket Con1mittee for the notifie4 area under s. 4, sub-s. (1) of the Act. The Market Committee was to con- D sist of twelve men1bers to b.e appointed in the n1anner set out ins. 5, sub-s. (1) -0f the Act. Six out of these twelve members \\'ere nominated hy the Go\'c1nment from among . the gro\vcrs of agricultural produce and owners of livestock undef s. 5, snb-s. (1), cl. (i), two were nominatd by the Govcrnn1ent from among traders under proviso to s. 5 sub-~. (1) cl. (iv_) and the Agriculh1re Extension Ollicer. M'ovva was nom.inated by the Government as dcpartn1ental representative under s. 5, snb-s. (1), cl. (iii)(a).

The Chairmcin of the l\Iarket Comn1ittee was elected on 24th January, 1970. Jn. consequence of the E judgment of the High Court of _Andhra Pradesh in Donde Ran1a Rao v. State A.I.R. 1971 Andhra Pradesh 353), the Government superseded 1he Market Committee. for a pcr'iod of six months on the ground that it was not competent to perform the duties imposed on it by or _un'der the Act. The initial period of "Six months for which the Market Comn1ittee v:as. superseded \Vas further extent.led and just before the expiration of the extended period of supersession, the Government made an order dated 7th December, 1972 constituting a f!eW l\.!arkct Committee by nominating six persons out of growers of agric, ultural produce and F owners of livestock under s. 5, sub-s.(1), cl.(i), the President of the Diviseema Cooperative Marketing Society, Avanigadda under s. 5, sub-s. (1), cl. (ii), the Agricultural Extension Officer. fovva as departmental representatives under s. 5, sub-s. (1 ), cl. (iii) (a) nnd three persons representing traders under the proviso to snb-cl. (iv) of s. 5, sub-s. (l). Though Divi taluk formed pa'ft of the notified area, no grower or trader fom Divi Taluk _was nominated 'On the Market Committee; all the six representatives of growers belonged to Badar Taluka \Vhile nll the three representatives of traders belonged to Machi!ipatnam taluk. Respondents Nos. 1 and 2, who we'fe two of the traders from G Divi Taluk, therefore, filed Writ Petition No. 1693 of 1973 in the High Court of Andhra Pradesh cha1lenging the validity of the order dated 7lh December, 1972 in so far as it nominated 'fepresentatives of traders on the A-Iarket Con1mittee under the Proviso to cl. {iv) of s11b-s. (1) of s. 5. The argun1ent of

repondent~ Nos. 1. and 2 was that it \vas the main part of cl. (iv) of sub-s.(J) of s. 5 \Vh1ch app!Ied and not the Proviso and, therefore the Government \Vas not entitled to nominate representatives of traders but tbev were liable to be elected by traders licensed. under s. 7, sub-s. (1) from amo-Ilgstthemselves. The learned Single Judge of the High C.ourt dismissed the Writ.. Petiiion. Thereupon H Respondents 1 and 2 prefe1Ted nn appeal under cl. 15 of the Letters Patent to a Division Bench of the High Court.

The Division Bench disagreed \Vith the view taken by the learned Singie Ju.dge and. held that when the Government constituted the new ~.farket Committee by It~ orde'f dated 7_th December, 197? on !he expiratiri.n of the pP.riod of supcrsess1on of the earher Market Comm1tteei it did not constitute a new

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SUPREME COORT REPORTS [1975] SUPP. s.c.n.

A J\Iarkct Committee for the first time, and therefore, the case \Vas governed., not by the proviso, but by the main pmt of s. 5, sub-s. (1), cl. (iv) and the order dated' 7th .December, 1972 was invalid in so far as it non1inatecl three members from among traders purporting to act under the proviso to s. 5r sub-s. (1), cl. (iv). The appellant thereupon brol!ght the present appcfll ¥.rfth

special leave obtained from this Court.

Di.smissing the appeal ,

lfELD: The main part of cl. (iv) of sub-s. (1) of s. 5 enacts t11at, as a general rule, members representing traders are tobe elected ·"bythe persons licensed under sub-s.(1) of s. 7 in the notified area from an1ong then1selves"'.

But the licence contemplated under sub-s. (1) of s. 7 is a licence to be granted by the Market Committee, and therefore, it must follow a forJiori that \Vhen a market comn1.ittee is to be constituted for the ffrst time, there wouJd be no "persons licensed under sub-s. (1) of s. T" in existence who could ekct members on the Market <::ommittee under the main part of cl.(iv) of sub-s-(1) of s. 5. That is \Vhy the proviso was enacted to deal with such a sit11ation, it says that \\hen -a !\1arket Committee is being constituted for the first time, the clectiYe meth<Xl being obviously inapplicable, n1cn1bers reprcscn_ing traders shaU

be nominated by the Government in the manner set out there. The !tlarket Con1mittee °"''hich is constituted by the Government on the expiration of the period of supersession _must necessarily be a new market committee 1 11S-a-vis the earlier one which is superseded. But that does not mean that it "" a market comrnit_tee constituted for the first time. lt would indee<t be doing violenceto the language of the proviso to say that such a market con1mittee is one constituted for the first time for a notified area, when there \Vas already an ear lier market committee constituted for the ame notified area, though it \Vas subsequently superseded. The proriso to cl. (iv) of sub-s. (1) of s. 5 ha.I_,

therefore, no application ant.I the Government \Vas not entitled to on1inare members representing traders on the Market Committee conslitutecl hy it under the order dated 7th December. 1972. It 'vas the main part of cl. (iv) of sub-s. (I) of s. 5 which applied. [225H, 226ADE, GH 227DHF]

ClVIL APPE'Ll~ATE JURISDICTION : Civil Appeal No. 1731 of 1974

Appeal by special leave from the judgment and order dated 27-8-74 of the Andhra Pradesh High Court in Writ 'Appeal No. 716 of 1973.

S. V. Gupte, A. V. Rangam and A. Subhashini, for the appellant.

A. Subba Rao, for the respondent.

The Judgment of the Court was delivered by

BHAGWATI, J.-This appeal, by special leave, r, a, iscs a very short question of construction of ertain provisions of the Andhra Padesh Agricultural Produce and Live-Stock Markets Act, 1966 (heremafter referred to as the Act). The narration of a few facts giving rise to the appeal would help to appreciate the question which arises for II determination, but it would be convenient first to refer to the relevant provisions of the Act before we recapitulate the facts.

The Act is a species of legislation \vhich has now been enacted in almost all States of India with a view to providing satisfactory conditions for the growers of agricultural produce to sell their produce on equal terms and at reasonable prices. Section 2 gives definitions of the

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G. v. GUNAYYA CHETTY ir. v.· DASARATHARAMAIAH (Bhagwati, J.) 221

varioui terms used in the Act, while sec; 3 provides for issue of notification by the Govemmelit declaring a spi!tific. area "to. be a notified area for the putposes· of this Act in respect o'f any agrii:nltural produce, livestock and products' of livestock. Then comes s. 4, which says in sub-s. (1), which is the only sub-section material for our purpose :

"The Government shall. constitute, by poti.fication, a, market

wrninittec , for every notifiea area from such Jlate as may be specified in the. notification and the matl>et committee so constituted. hall be a body corporate by such name as the Government may specify in the said notific<1.tion, having perpetual successiop. and a common seal with power to acquire, bold and dispose of property and may, by its corporate name, sue aµd. be sued."

T11e c.ornposition of. market committee is laid down in s. 5. Sub-s. (1) of that section provides :

"Every market committee shall consists of such number of members,. being not less than twelve and not more than , b sixteen, as may be fixed for it by the Government and shall be constituted in the following manner :-

(i) uot less than one-half of the members, to be appointed by the Government, after c.onsultatio~ with the Director of Marketing, from among the growers of agricultural produce and the owners of livestock and products of

I<: livestock in the notified area ;

(ii) one non-official from the notified area, to be elected by the members of the local cooperative marketing sbcieties ; or in the absence of uch societies to be elected as specified in clause (iv) ;

(iii) (a) one representative, having jurisdiction over the notified area, of the Agricultural Department or the Animal Hus!iandry Department, to be appointed by the Governmep.t;

(b) two representatives~ one each, of the municipality ' within which the office of . the market committee is located and of the gram panchayat!! comprised in the notified area, to be elected by the members of the municipality and the gram panchayats respectively ; or in the absence of such municipality both representatives to be elected by the members of the gram panchayats ; or in the absence of a gram panchayat, only one representative to be elected by the municipality ;

(iv) the remaining members, to be elected in the prescribed manner by the persons licensed under sub, section (1) of Sec. 7 in the notified area from among themselves :

Provided that where a market committee is cortstituted in any notified area for the first time, the Government shall appoint

SUPREME CO_l.JRT REPORTS

[1975] SUPP. S.C.R.

the members under this clause from out of a panel of traders of the notified agricultural produce, , livestock or products or livestock in the notified area, furnished by the Director of Marketing to the Government."

Sub-section (2) says that every market 'committee shall elect two of its members other than those mentioned in clause (iii) of sub-s. (1), to be respectively Chairman and Vice-Chairman.. and sub-sec. (3) enacts that save as otherwise provided in the Act, the term of office of the members appointed or elected under sub-s. (1) shall be three years from the date of the election of the Chairman.

The other subsections of sec. 5 are not material and we need not refer to them.

Sub-s. (2) of s. 6 empowers the Government to extend the tenn of office of the members of the market committee for a period not exceeding one year mbject to the proviso that no such extension shall be given for a period exceeding six months at a time. What is to happen on the expiration of the term of the office of the members of the market committee, whether original or extended. is set out in sub-s. (I) Qf s. 6.

That sub-section says that on the expiration of the term of th~ omce D of the members of the market committee, the Government .shall reconstitute the market committee.

Then follow certain other sectioil.s which have no bearing on the controversy before us and we may, therefore, straight go to section 22 which deals with supersession of market committee. That section is very material and we m:1Y reproduce it in extenso.

"Supersession of market committees.-(!) lf in the opinion of the Government a market committee is not competent to perform or persistently makes default in performing the duties imposed on it by or under this Act, or abuses. its powers, they may, by notification, supersede such committee for a period not exceeding one year in the first instance and may, by order, extend, from time to time the period of supersession so however, that the total period of supersession in the case of any market committee shall not exceed two years:

Provided that before issuing a notification under this sub'section, the Government shall give to the market committee an opportunity of making representation on the action proposed and shall consider the explanation or objection, if any, of the market committee thereon.

(2) As from the date of publication of a notification under sub-section (1), superseding a market committee.

H the following consequences shall ensue-

(a) all the members as well as the Chairman and Vice-

Chairman of the fr1arket committee shall be deemed to have vacated their oftices;

(b) all. the assets vested in the marketcommittee shall, subject to all its liabilities, vest in th!> Government.

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G. v .. GUNAYYA CHETTY v. V. DASARATHMA~!A!AH (Blzagwati, J.) 223

(3) Where a market con1mittce has been superseded- A

(a) the Government may, by order, appoint a suitable person or persons to exercise the powers and perform the functions of the marke'\ committee during

the period of its superscssion and transfer to such . person or persons the assets and liabilities of the superseded market committee as on the dMe of such transfer, and

(b) the Government, may at any time before the expiration of the period of supcrscssion, constitute a _new market committee under sub-section ( 1) of section 4 and transfer thereto the assets and liabilities of the superseded market committee as on the date of such transfer."

Bearing in mind these relevant provisions of the Act, we may now turn to the facts leading up to the present appeal before us.

The Government, by notification issued under s. 3, sub-s. (3) ot the Act, declared the area comprised in Maebilipatnam, Badar and

Divi taluks to be notified area for the purposes of the Act.

This was followed by a notification dated 30th October, 1969 constituting a Market Committee for the notified area under s. 4, sub-s. ( 1) of the Act.

The Market Committee was lo consist of twelve members to be appointed in the manner set out in s. 5, sub-s. (1) of the Act.

Six out of these twelve members . were nominated by the Government from among the growers of Agricultural produce and owners of live-stock under s. 5, subcs. (1), cl. (i), two were nominated by the Government from among traders under the proviso !o s. 5, sub-s. (1), cl.

(iv) and the Agriculture Extension Officer, Movva nominated by the Government as departmental representative under s. 5, sub-s. (1), cl. (iii)(a).

It docs not appear from the record whether the other thre Jnembers were appointed as contemplated by s. 5, sub-s. (1), els. (ii) and (iii)(b).

The Chairman of the Market Committee was elected on 24th January, 1970 and the term of office of the members of the Market Committee was, therefore, three years from that date as provided in s. 5, sub-s. (3).

It, however, appears that in the case of Market Committee constituted by , the Government for some other notified areas, writ petitions were filed in the High Court of Andhra Pradesh challenging 1he validity of the nominations made by the Government under s. 5, sub-s. (1), cl. ( i) and clause (iv) proviso. The ground of challenge in regard to the nominations made under s. 5, sub-s. (1), cl. (i) was that the Government had not complied with the mandatory requirement of that provision which enjoined it to consult the Director of Marketing before nominating members from among the growers of agricultural produce and owners of livestock in the notified areas in n; gard to nominations made under the proviso to s. 5, sub-s. (l), cl. (iv), the challenge was based on the ground that the nominations were made by the Government outside the panel of traders

A furnished by the Director of Marketing. These grounds of challenge were upheld by the l:!igh Court in a decision reported in Donda Ram Rao v. State(') and it was held that the nominations made under s. 5, sub-s. (1), cl. (i) and the proviso to cl. (iv) were in contravention of those respective provisions and were accordingly invalid.

Though this decision was given in regard to the Market Committee& B of other notified areas, it equally applied to the Market Committee constituted for the notified area of Machilipatnam, Bandar and Divi taluks and hence it was obvious that the nominations made by the Government from among the growers of agricultural produce and owners of livestock under s. 5, sub-s. (l), cl. (i) and from among traders under the proviso to s. 5, sub-s. (1), cl. (iv) were invalid.

But that would leave only one or at th~ highest four validly appoint- C ed members on the Market Committee. and the quorum for a meeting of the Market Committee under rule 29 of the Andhra Pradesh Agricultural Produce and Livestock Markets Rules, 1969 made under s. 33 of the Act being &ave, it would be incompetent to the Market Committee to exercise its powers and discharge its functions.

The Government, therefore, after giving an opportunity to the exist- D, ing members of the Market Committee to be heard, passed an order dated November, 1971 under section 22, sub-s. (I) of the Act superseding the Market Committee for a period of six months on the ground that it was not competent to perform the duties imposed on it by or under the Act.

The consequence of this supersession was that aU the members of the Market Committee were E deemed to have vacated their offices and all the assets vested in the Market Committee, subiect to all its liabilities. became vested in the Government.

Vide sub-s. (2) of s. 22.

The Government by another order of foe sam-o date made under s. 22, sub-s. (3), cl. (a) appointed the Assistant Din; etor of Marketing to exercise the powers and perform the functions cif the 'Market Committee during foe period of its supersession. It may be stated that none of the per- F sons affected challenged the order of supersession made by the Government and it does not form the subject matter of challenge even in the present appeal. ·

It appears that the initial period of six months for which the Market Committee was superseded was further extended and just before the expiration of the extended period of supersession, the G Government made an order dated 7th December, 1972 constituting a new Market Committee by nominating six pers"ons cut of growers of agricultural produce and owners of livestock under s. 5, sub-s. ( l). cl. (i}, the President of the Diviscema Cooperative Marketing Society, Avanigadda und-or s. 5, sub-s. (1), cl. (ii), the Agricultural Extension Officer. Movva as departmental representatives under s. 5, sub-s. ( 1), cl. (iii)( a) and three persons representing traders under H the proviso to sub-cl. (iv) of s. 5, sub-s. (l). Though Divi taluk formed part of the notified area, no grower or trader from Divi Taluk was nominated on the Market Committee all the six representatives of growers hclong'-.d to Badar taluk, while all the representatives of traders belonged to Machillipatnam -taluk.

Rcspon-

(1) A.I.R. 1971 Andhra Pradesh 353.

...

- .

G. v, GUNAYYA CHETT, Y v. v. DASARATHl\RAMAIAH (Bhagwati, !.) 22;

dents Nos. 1 and 2, who were two of the traders from Divi Taluk, therefore filed Writ' Petition No. 1693 of 1973 in the High Court of . Andhra Pradesh challenging the validity of the order d, ated 7th December, 197Z in so far as iL nominated representatives of traders on the Market Committee 411der the Proviso to cl. (iv) of .sub-s. (I) of s. 5.

The .argument of respondents Nos. 1 and 2 was that it was the main part of cl.. (iv) of sub-s. (1) of s. 5 which applied and not the Proviso and, therefore, the Government was n.ot entitled to nominate representatives of traders but they were liable to be selected by traders licensed _under s. 7, sub-s. (1) from amongst themselves. The appellant who was one of the representatives nominated by the Government, resisted this argument and defended the order dated 7th December, 1972. ]be learned Single Judge, who heard the writ petition in the first instance, rejected the contention of respondents Nos. 1 and 2 and held that when the Government constituted the new Market Committee by issuing the order dated 7th December, 1972, it constituted the Market Comfl)ittee for the first time, and therefore, under the proviso to s. 5, sub-s. (1), cl. (iv), the Government was entitled to nominate members from out of the pnel of traders furnished by the Director of Marketing and the order dated 7th December, 1972 did not suffer from any infirnlity.

On this view, the learned Single Judge dismissed the writ petition.

Respondent Nos. 1 and 2 being aggrieved by the order made by the learned Single Judge preferred an appeal under cl. 15 of the Letters Patent to a Division Bench -of the High Court.

The Division Bench disagreed with the view taken by the learned Single Jiidge and held that when the Government constituted the new Market Committee by its order dated 7th December, 1972 on th~ expiration of the period of supersession of the earlier Market Committee, it did not constitute a new Market .Committee for the first time, and therefore, the case was governed, not by the proviso, but the main part of s. 5, sub-s. (1), cl. (iv) and the order dated 7th December, 1972 was accordingly invalid in so far as it nominated three members from among traders purporting to act under proviso to s. 5, sub-s. (1 ), cl. (iv).

The appellant thereupon brought the present appeal with special leave obtained from this Court.

The sole question that arises for determination in this appeal is G as ta which provision applied in the present case: the main part of cj. (iv) of sub-s. (1). of s. 5, or its proviso.

The answer to the question depends upon whether the Market Committee was constituted for the first time when the Government made the order dated 7th December, 1972.

The main part of cl. (iv) of sub-s. (1) of s. 5 er\acts that, as a general rule, members representing traders are to "he elected "by the persons licensed under sub-s. (1) of s. 7 in the H notified area among themselves".

But the licence contemplated under sub-s. (l) of s. 7 is a licence to be granted by the Market Committee, and therefore, it must follow a fortiori that when a market committee is to be constituted for the first time, there would be no "persons licensed under sub-s. (l) of s. 7" in existence who could elect members. on the Market Committee under the main part

of cl. (iv) of sub-s. (I) of s. 5.

That is why the proviso was enacted to deal with such a situation.

It savs that when a Market Committee is being constituted for the first time, the elective method being obviously inappli.cablc, members representing traders shall be nominated by the Government in the manner set out there. Whenever, therefore, a question arises as to which is the appropriate method to be adopted in appointing members representing traders-whether elective method under the main part of ci. (iv) of sub-s. (1) of s. 5, or nominative method under the proviso--the inquiry which has to be made is: is the Government constituting the market committee for the first time, or has it already been constituted once before and in view of the expiration of the term of ot!ice of its members or its supersession, it is being constituted again?

Let us first take a case where a market committee has bec'l constituted for a notified area for the first time and the term of ollicc of its members, whether original or extended, expires.

The Government is then required to reconstitute the market commit!ee under I} s. 6. 'Reconstitute', according to its plain natural connotation, means nothing else than 'constitute again'. 111c Government has, tkrefore, to constitute the market committee again.

That would clearly be a new market committee, but it would not be a market committee constituted for the first time, for there was already an clearly be a new market committee, but it would not be a. market came to an end by eftlux of time.

The proviso to cl. (iv) of sub-s.

E (I) of s. 5 can, therefore, obviously, on its plain language, have no application in such a case.

The raison d'etre for the necessity of nomination under the proviso would also not be there.

Thm, does it make any difference whether a market committee constituted for a notified area for the first time is superseded and on F the expiry of the period of supersession, a new market committee is constituted by the Government under sub-s. (I) of s. 4 as contemplated by sub's. (3) (b) of s. 22?

The market committee which is constituted by the Government on the expiration of the period of supersession 1nust necessarily be a new market con1mittec vis-a.\is the earlier one which is superseded.

But that does not mean that it is a market committee constituted for the first time. It would G indeed be doing violence. to the language of the proviso to say that such a market committee is one constituted for the first time for a notified area. when there was already an earlier market committe~ constituted for the same notifo:d area, though it was subsequently suspcrsedcd. There is no scope here for verbal semantics. It is a simple question we have to ask for ourselves: is this a n1arkct cu1nmittee constituted for the first time for this notified area or has H there been , l\ market committee before so that this is not the first time that a market committee is constituted for this notified area? If this question is asked, the answer is simple and self-evident.

When there is a market committee constituted for a notified area and it is superseded and on th~ expiry of its supersesion, new. market committee is constituted by the Government, It is 1mposs1ble to see how it can be said that the new market committee is a market

. -

G. v. GUNAYYA CllETTY v. V.· DASARATllARAMA!AH (li/wgwati, !.) 227

- . ...

:ommittee constituted for the first time for !his notified area.

Whether a market committee is constituted for the first tinie or not would depend on the question whether there was an earlier market. committee for the same notified area or not and not on the question whether it is a new market committee c9nstituted under sub-s. 11) of s. 4, or a market committee reconstituted under s. 6.

Here in the present case, there was a market committee constituted by the Government for the notified area of Machilipatnam,

Banda~ and Divi taluks under the notification dated 30th October, 1969 and this Market Committee functioned until it was superseded by the order dated 23rd November, 197 J.

It may be reiterated once again that the supcrsession pf this Market Committee on the ground that by reason of want of sufficient members to constitute quorum, it was not competent to perform the duties imposed on it by or under the Act, was not challenged before us and we must, therefore, proceed on the basis that it was a market committee which had existence until it was superseded and it was not non-est ab initio When, therefore, the Government made t11c order dated 7th December, 1972 on the expiration. of the period of supcrsession of this Market Committee, it undoubtedly constituted a m:w market committee-new vis-a-vis the old which was superseded-but that was not a market committee constituted for the first time for the notified area of Machilipatnam, Bandar and Divi taluks.

There was already an earlier Market Committee for this notified ar-<a which was superseded and this was a second Market Committee constituted for this notified area on the expiration of the period of supersession of the earlier one.

The proviso to cl. (iv) of suh-s. ( 1) of s. 5 had, therefore, no application and the Government was not entitled to non1inatc mcn1bers representing traders on the 1vfarkct Co1nn1ittee constituted by it under the order dated 7th December, 1972.

It was the main part of cl. (iv) of sub-s. (!) of s. 5 which applied an<l so far as representation of traders was conccrnca, "persons licensed under sub-s. (l) of s. 7 in the notified area" were entitled to elect members from among themselves.

We most, therefore, hold that the Division Bench of the High Court was right in takina the view that the order dated 7th December. 1972 was invalid fu so far as it purported to nominate tqrce members from among traders under the proviso to cl. (iv) of sub-s. (I) of s. 5.

, The appeal, therefore, fails and is dismissed with costs in this

J ___ ,;

cour:t. •

V.M.K.

Appeal dismissed .

ANR

V. DASARATHARAMAJAH & ORS

P. K. GOSWAMI, JJ.

sec. 5

section 7 and 2

s. 4

s. 5

s. 5

s. 5

s. 5

s. 5

s. 5

s. 5

s. 5

s. 5

s. 7

cl. 15

s. 5

s. 5

s. 5

s. 7

s. 7

s. 5

s. 5

s. 5

Section 2

s. 4

s. 5

Sec. 7

sec. 5

s. 6

s. 6

section 22

section 4

s. 3

s. 4

s. 5

s. 5

s. 5

s. 5

s. 5

s. 5

s. 5

s. 5

s. 5

s. 5

s. 5

s. 5

s. 33

section 22

s. 22

s. 22

s. 5

s. 5

s. 5

s. 5

s. 5

s. 5

s. 7

s. 5

cl. 15

s. 5

s. 5

s. 5

s. 5

s. 7

s. 7

s. 7

s. 5

s. 5

s. 6

s. 5

s. 4

s. 22

s. 11

s. 4

s. 6

s. 5

s. 5

s. 7

s. 5


COMMISSIONER OF SALES TAX, li.P.

M/S. SARIN TEXTILES MILLS

April 21, 1975

(R. S. SARKARlA AND A. C. GUPTA, JJ.J

U.P. Sales Tax Act, 1948, ss. 3 ilnd 3A-'Wool/cn Carpet Yarn' if un.\pun frbrc used in wearing.

The respondent is a manufacturer of and dealer in '\Voollen Carpet Yarn', popularly known as kati.

For the assesSmenl years 1959-60 and 1961-62 he was taxed by the Sales Tax officer at 6 pies per rupee nnd 3 pies per rupee, respectivcJy, under two notifications applicable to the. two assessment years respectively, issued under the U.P. Sales Tax Act, 1948. On appeal, the Assistant Commissioner held that kati \Vas an unclrissified item tuxable at 2 pies per n1pce under s. 3 of the Act, and the order \\'as confirn1ed on reYision and by the High Cou:t on reference.

The two Notifications provided (1) that turnover of 'Yarn of all kinds including unspun fibre used in weaving' is liable to tax at 6 pies per tu>lee, and (2) turnover of yarn of all kinds -including unspun fibre used in weaving, is liable to tax at 3 pies per rupee. There was another notification \Vhich provided that turnover of "Woollen goods excluding carpet but including knitting wool'' is liable to tax at one anna per rupee ..

The authorities under the Act found that kati are short cut pieces of unspun fibre about 2 inches in length ; !hat the pieces have \•cry little tensile strength and are not used, and are not caP'abJe of being used, for weaving, knitting or rope-making ; that the only use to which kati is put is by attaching each piece by hand around hvo warp threads; that it is not a component of the basic fabric of the carpet ; that it is not an integral constituent of the warp and weft of tbe carpet which cono; ists of a different spun fibre of great tensile strength ; and that the process of looping or knotting kati is different and _dist; inct from the pro cess of lengthwise and crossv.'ise combining of \\'arp and weft components \Vhich makes the woven basic structure of the carpet.

Dismissing the appeal to this Court.

H'ELD : (I) Kati is not 'yam' because one of the characteristics of yarn is that it should be spun thread, \Vhereas kati is unspun fibre.

[231H]

(2) It is not unspu1i fibre 11SL'd in weaving v."ithin the n1erining of the first two notificacions because, on the facts found, it is not used in wea\'ing.

(233-1;'-DJ

(3) ]t is not ''voollen gocds' within the n1eaning of the 3rd notification, because.

[233-C-DJ

(a.) Katri is on1y niw material from ¥.'hich 'woollen goods' are prepared : and [233-E]

'(b) Yarn .use~ in \\'Caving the .'van? and weft of carpets, or woollen fibre used in \Veav1ng 1s, under the not1ficattons, taxale at a par lower rate than 'woollen goods': and it could never have been 1ntende~ that a mere component or raw material, used by a manual process, not being a process. of \Vcaving in the manufacture of 'woollen goods' should be taxed at a higher rate treatlng kati as fiished 'v.'oollen goods'. [233E.F.] '

( 4) Therefore, it is an unclassified item and the turn-over is liable to tax A only at 2 pies per nipee.

CIVIL APPELIATE JURISDICTION : Civil Appeal Nos. 1934-35 of 1970 and 1172-73 of 1974.

Appeal by Special Leave from the Judgment and Order dated the B 30-4-1970 for the Allahabad High Court in S. T. R. No. 191 of 1969.

0. P. Rana for the appellant.

S. C. Manchanda and P. C. Kapoor for the respondent.

The Judgment of the Court was delivered by

SARKARIA, J.~Thesc appeals by special leave are directed.' against the judgment of the High Court of Allahabad answering in favour of the assessee the following question referred to it under s. 11 of tlie U.P. Sales Tax Aot, 1948 (for short called the Act):

"Whether the articles "carpet woollen Yarn" is covered by the term 'yarn' mentioned. in item No. 4 of notification No. ST-907/X, dated 31-3-1956 and item No. 33 of notification No. S.T. 1365/X dated 1-4-1960 taxable at 6 pies and 3 pies per cent respectively or a kind of woollen goods as mentioned at item No. 46 taxable "at one amp per rupee according to notification No.

ST-905/X dated 31-3-56 or whether it is an unclassified item taxable at 2%".

M/s. Sarin Textile Mills, Agra is a manufacturer of and dealer

in "woollen carpet yam", popularly known as "kati".

The relevant assessment years are 1959-1960 and 1961-62.

The only dispute is whether such kati should be taxeil as "yarn" at 3 % or as "woollen goods" at one .anna per rupee, under the relevant notification issued under s. 3-A or as an nnclassified item at 2 % under s. 3 of the G Act.

The Sales-tax Olhcer by his order dated 6-10-1965 regarded it as a 'kind of yarn' covered by Entry No. 4, Notification no. ST-907 / X dated 31-3-1956, and so taxed it at six pies per rupee for 1959-60 and at 3 per cent for the year 1961-62 in view of subsequent H notification ST-1365/X dated 1-4-1960.

On appeal by the asscsce, the Assistant Commissioner (Judicial) reversed that interpretation and held that woollen carpet kati was an 'unclassified item' taxable at the rate of 2 per cent.

A The Commissioner of Sales-Tax moved the Revisional Authority under s. IO of the Act against the order of the Assistant Commissioner (Judicial).

The Judge (Revisions) agreed with the interpretation adopted by the Assistant Commissioner (Judicial) and dismissed the revision applicMion.

On application filed by Commissioner under s. 11 (3) of the Act, the Judge (Revisions), referred the aforesaid question to the High Court.

The High Court also held that the woollen carpet kati is not 'yarn' since it is unspun fibre not used in weaving. and, as such, it is not taxable as a 'kind of yarn' under tile aforesaid notification.

It further rejected the alternative contention of the Revenue that woollen carpet kati' is taxable under the notification No. ST-905/ X as "woollen goods".

Jn the result, the High Court answered the questions against the Revenue. Hence these appeals.

Mr. Rana learned Counsel for the appellant contends that the term "yarn" used in the aforesaid notification should be interpreted D in the sense in which it .is understood by persons engaged in the trade.

Stress has been placed on the fact that in English, e\t:n the as.sessee has been describing the article in question as "woollen carper yran".

Such kati, it is pointed out is used in the manufacture of carpets by a process of 'knotting', which in ordinary parlance is described as 'weaving'. According to Mr. Rana, the distinction E drawn by the High Court, between 'weaving' and 'knotting' -being

too fine and artificial, is not justified. lt is maintained that tk Sales-tax Ofliccr had rightly held that all twisted wool fibres are yarn'. Since this woollen kati is such a fibre, it is yarn and taxable as such under the aforesaid notifications.

Jn the alternative. Counsel submits that this article falls within the purview of "woollen goods"

and in taxable as such under notification No. ST-905/X of 1956.

F As against this, Mr. Manchanda, learned Counsel for the assessee contends that in the past for about 8 years. the Revenue had been understanding and treating for the purpose of taxation, "woollen carpet kati" as au article ditlerent from "yarn" and "woollen goods" within the contemplation of the aforesaid notifications.

It: is stressed that for the first 'lime it was on 23-9-1963 that the Sales-tax Officer G departed frorn this time-honoured interpretation and held . "woollen carpet kati" to he "yarn" within the said notifications. lt is submitted that tbe High Court's opinion, that woollen carpet kati is'

neither "yarn" nor ''woollen goods", proceeds on facts found by the Assessing Authority on the basis of evidence adduced regarding the nature and use of this article.

On those facts, it is maintained, no other reasonable interpretation than the one accepted by the H High Court is possible.

The notifications concerned issued under s. 3-A of the Act, are these:

"(i) Notification No. ST 907 /X dated 31st March, 1956.

It declares that the turnover of certain commodities menc.s.T. v. SARIN TEXT!1ES (Sarkaria, J.)

tioned therein should be taxed at a single point, at the point of sale by the manufacturer or the importer, at the rate of six pies per rupee. The relevant entry of this notification is no. 4, which reads: ·

"Yarn of all kinds, including unspun fibre used in

weaving, other than handspun yarn but excluding cotton B yarn in cops a.hd cones". (emphasis added)

(ii) Notification No.

ST. 1365/X-990 1956 dated April I, 1960.

It is also a notification under section 3-A of the Act and the relevant entry is at item No. 33 which reads :

"Yarn of all kinds including unspun fibre used in weaving other than handspun yarn but excluding cotton yarn." (emphasis added)

(iii) Notification No. No. ST-905/X dated 31st March,

1956.

The relevant entry is at item No. 46 which reads .

"Woollen goods excluding carpet but including knitting wool."

The rate of tax prescribed is one anna per rupee.

The first point to be considered kati" is "yarn" within the meaning catalogued above.

is, whether "woollen carpet of Notification (i) and (ii)

"Yarn" bas not been defined either in the Act and the Rule;, or in the Notifications.

We have therefore to construe this term in its ordinary grammatical sense. According to "Oxford Dictionary" "yarn" means:

"Any spun thread specially of kinds prepared for weaving, knitting or rope-making".

Webster's New World Dictionary also, gives its meaning thus:

"Any fibre, as woo!. silk, flax, cotton, nylon etc. spun into strands for weaving, knitting or making thread".

Thus, a fibre in order to answer the description of "yarn" in the ordinary commercial sense, must have two characteristics. Firstly, it should he a spun strand.

Secondly, such strand hould be

primarily meaut for use in weaving, knitting or rope-making.

 Now, it is an undisputed fact, in the instant case, that "woollen carpet kati" is unspun fibre.

It lacks the first characteristic of "yarn". It is therefore possible to say that, by itself, the expression "yarn of all kinds" in the notifications, quoted above, would not cover ; . unspun fibres. But the succeeding phrase "including unspun fibre

10 SC/75-16

A used in weaving" qualifies the preceding expression "yarn" of all kinds". This phrase, which, in one sense, extends the connotation of "yarn" by including in it unspun fibre, pinpoints and highlights, on the other hand, the usability of such nnspun fibre in weaving as a determinative circumstance.

B The question thus narrows down into the issue : Is woollen carpet kati--which is admittedly unspun fibre-"used in weaving" within the contemplation of these notifications ? Again, "weaving" has not been defined in these notifications or the other statutory provisions. We have therefore to fall back upon its ordinary dictionary meaning. In that sense, 'weaving' implies the process of forming thread into fabric C by interlacing. "The most important method by which wool products {Ire produced is weaving, the interlacing at right angles of two or more systems of threads. Variations are almost limitless but all arc derived from three basic weaves, plain, satin and twill. Hundreds of yarns, wound on large spool or beam form the warp.

Each yarn is drawn through the eye of a heddle or wire mounted on a harness frame. The alternate raising and lowering of the frames, each with its D hundreds of heddles controlling the warp yarns, forms the shed, the space through which the weft or filling yarn is carried by the shuttle, a long satreamlined box holding a bobbin of yarn in its hollowed. centre. Each trip of the shuttle is called a pick. After each pick the harness frames shift position in accordance with the predetermined pattern, producing a new shed or different combination of raised and E lowered warp yarns. The filling yarn are beaten down with a weaver's read to make a tighter weave". (Encyclopaedia Brittanica Vol. 23, p. 342, 1971 Eda.)

Thus "weaving" is the process of combining warp and weft components (respectively lengthwise and cross-wise) to make a woven structure. The threads that lie lengthwise are called the warp. The other threads which are combined with the warp and lie widthwise, are called the "weft", also known as "woof". An individual thread from the warp of indefinite length, is called an end; each individual length of weft from one edge to the other is called a pick. Consecutive picks. are usually consecutive lengths of one piece of weft yarn that is repeatedly folded back on itself. In all methods of weaving before a G length of weft is inserted in the warp, the warp is separated, over a short length extending from the cloth already formed, into two sheds.

The process is called shedding. The sequence of primary operations in one weaving cycle is thus shedding, picking and beating in. (Encyclopaedia Brittanica Vol. 23, p. 342).

Weaving is differentiated from both warp and weft, knitting from H braiding, and from net making, in that these processes all make use of only one set of elements. In addition there are geometrical differences". (Encyclopaedia ibid).

The ground having been cleared, it is to be seen whether the process by which woollen carpet Kati is used in preparation of carpets, can properly be called "weaving".

Now, the facts found on the basis of evidence adduced by the Additional Appellate Commissione( and the Judge (Revisions) Sales Tax are that such woollen kati are short ent pieces of unspun fibre (each of which according to the aforesaid Encyclopaedia is about - 2 inches in length).

It has very little tensile strength and is not used-as it is not capable of being .used-for weaving, knitting or rope-making.

The only use to which the kati or pile is put is by attaching each piece by hand around two warp threads. The kati is not a component of the basic fabric of the carpet. It is not an integral constituent of the warp and weft of the carpet which consists of a different spun fibre of great tensile strength i.e. of yarn.

The process of looping or knotting these pile tufts is different and distinct from the process of lengthwise and crosswise combining of warp and weft components, which makes the woven basic structure of the carpet.

In view of these primary facts found by the taxing authorities, the conclusion is inescapable, that woollen carpet kati is neither "yarn", nor "unspun fibre used in weaving" within the contemplation of the aforesaid notifications issued under s. 3-A.

This takes . us to the second question as to whether such kati wonld fall within the ambit of "woollen goods" under entry 46 of Notification (iii) set out above.

Here also, we find ourselves in agreement with the Division Bench of the High Court that woollen carpet kati is only raw material from which "woollen goods" are prepared.

In this connection it is to be noted that yam used in weaving the warp and weft of carpets, or woollen fibre used in weaving has been made taxable at a far lower rate than "woollen goods" under the Notifications. It could never be the intention that a mere component or raw material used in the manufacture of woollen goods by a manual, process, not being a process of weaving, should be taxed at a far higher rate, by treating the same as a finished "woollen goods".

For the foregoing reasons, we are of the opinion that "woollen carpet kati" is neither "yam" nor "woollen goods" falling under the aforesaid notifications issued under s. 3-A. It is an unclassified item and its turnover is liable to tax at the rate of 2 % under s. 3 of the Act.

Accordingly we affirm the answer given by the High Court to the question referred and dismiss these appeals with one set of costs.

V.P.S.

Appeals dismissed.

COMMISSIONER OF SALES TAX, li

M/S. SARIN TEXTILES MILLS

A. C. GUPTA, JJ

Sales Tax Act, 1948

ss. 3

Sales Tax Act, 1948

s. 3

s. 11

s. 3

s. 3

s. 11

s. 3

section 3

s. 3

s. 3

s. 3


STATE OF MADHYA PRADESH & ORS.

TJKAM DAS

April 22, 1975

[V. R. KRISHNA IYER, R. S. SARKAR!A AND A. C. GUPTA, JJ.]

Madhya Pradesh Excise Act (2 of 1915)-General conditions of licence 1nade u11der the Act, r. 26 and Foreign Liquor Rules n1ade u11der the Act, r. 4-Balance of stock 011 expiry of licence-Enhancnzent of licence fee for next year-If bafance of stock liable to enhanced fee.

Delegated legislation-When rule can be n1ade retrospective.

The respondent had a licence for sale of foreign liquor is..'!tted under the J; orcign Liquor Rules made under the Madhya Pradesh Excise Act, 1915. On the date of the expiry of the licence (Jlvlarch 31, 1964), he had a large quantity of unsold foreign liquor, \Vhich had to be surrendered by him to the authorities.

As the Government was conten1plating enhancing the licence fee. he gave an undertaking to pay the difference and he \\'as allowed to keep the execs.; stock.

He also obtained a fresh licence for one year comn1encing on A::iril 1, 1964.

On April 25, 1964, the Foreign Liquor Rules were amended.

The scale of licence fees i,.vas enhanced \Vith retrospective effect from April 1, 1964; and r. IV wa~ amended providing that the licensee shall be liabl~ to pay the difference in the event of the enhancement of the scale of fees on the balance of stocks during the currency or on the expiry of the licence.

But the State's demand for the difference was successfully challenged by the' respondent, in the High Court, on the ground that the balance of stocks on f\iarch 31, 1964, was covered by the licence fee already p<iid and conld not be subjected to enhanced levy.

F Allowing the appeal to this Court,

HELD : (1) Subordinate legislation made by a delegate cannot have retrospective effect unless the rule-making power in the concerned statute expressly er by necessary implication confers power in this behalf.

But s. 63 of he Act does contemplate not merely the po\ver to make rules but to bring th~:n1 into force from any previous date. It states that all rules made under the 1\ct shall have effect from the date of publication in the official gazette or frtJln .n1ch other date as may be specified in that behalf. Therefore, the enhanced G levy of licence fees operates from April I, 1964. [236F, H 237AJ

(2) Rule XXVI of the General Licence Conditions provides that if there is enhancement of duty, the licensee shaJI pay the difference of duty on the 'balance of stocks' as on the date preceding the expiry of the licence. The rule tilso provides for refund by the State if there is a reduction of duty. -Reading this rule with the amended r. IV of the Foreign Liquor Rules, the 'balance of stocks' is the surplus stock held by the licensee immediately before the expiry

cf his licence. Therefore the quantity held over on March ,31, 1964, became H liable to the enhanced licence fee on April l, 1964.

[238E-F]

(3) (a) If the respondent's contention is accepted l?ersons \Vho ~1.ve huge stocks Jeft over will not have to pay the enhanced licence fee while fre:o; h

licensees would be so liable i and [238-G]

(b) If the respondent had surrendered his stock as he should have but for his undertaking he would have had to pay the enhanced rate for such left-over stock. [238HJ

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M.P. STATE v. TIJ!:AM DAS (Krishna lyer, J.) 235

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 668 of 1968.

From the Judgment and Order dated 2nd March 1965 of the Madhya Pradesh High Court in Misc. Petition No. 348 of 1964.

Ram Panjwani, l. N. Shroff and H. S. Parithar, for the appellants.

B. N. Lokur and A. G. Ratnaparkhi, for the respondent.

The Judgment of the Court was delivered by

. KRISHNA IYER, l-The claim of the appellant, the State of Madhya Pradesh, to leavy enhanced license fee on the spill-over stock C of intoxicating liquor held as on April 1, 1964 by the respondent who runs a bar, was successfully challenged in the High Court. So the State has come up in appeal, by certificate, under Art. 133 and disputes the correctness of the view accepted by the High Court.

As is obvious, the facts are brief and beyond dispute, the issue of law straight and simple and our decision, on a careful study of the alternative constructions of the relevant provision, is that the State is entitled to collect the fee on the revised scale. The respondent runs a cafe at Indore and a foreign liquor bar booths expensive sales and attracts affluent a&:licts. Naturally, as a profitable proposition the respondent obtained a licence for the sale of foreign liquor (in Form F. L. 3) issued µnder the Foreign Liquor Rules framed under the Excise Act, 1915('). The licenc~ which he held was for one year from April 1,

J 963 to March 31, 1964. At that time, under the extant rules the fee payable was 37 paise per quart bottle of malt liquor and different rates for other kinds of foreign liquor. On the date of expiry of the licence, viz., 31st March 1964, the respondent had with him a large quantity of unsold liquor which was already in the licensed premises, having been brought earlier. He obtained a fresh licence for a further period of one year commencing from April 1, 1964. Meanwhile Government was entertaining the idea of enhancing the scales of licence ree for the various kinds of foreign liquor. The balance quantity left over with the respondent at the end of the licensed period, viz., March 31, 1964 was checked by the concerned Excise Officials and a panchnama prepared in that behalf. Ordinarily, the surplus stock has to be surrendered by the licensee but, on an undertaking to pay !he difference in the event of an enhancement of the rates, the bar owner was permitted to keep on his premises the balance quantity so ascertained.

Apparently the State Government had decided on the increased rate because we find from Annexure B a demand being made by the Excise Inspector on the licensee -to pay the difference of fees consequent on the enhancement of the scale of fees, as worked out on the stock which remained in hand with the owner of the bar on the night of March 31, 1964: Despite !he undertaking given to comply with such enhanced demand, the hotelier resisted it and took up the stand that the balance stock had already been subjected to licence fee when it was brought in and that the subsequent raising of the rate of licence

(1) Madhya Pradesh Excise Act, 1915 (Act II of 1915).

A fee could not be applied validly to such stocks. Since the State insisted, on levying at the larger rate even on the balance stock held on March 31, 1964 the respondent moved the High Court for the issuance of a writ quashing the demand as illegal. The legality of the levy depends on the applicability of the enhanced scales of licence fee to the balance of foreign liquor stock held by the licensee on the micl- B night of 31/3-1/4/1964.

The facts being thus plain, we will straight go to the law relied on by the State in support of its claim. The Excise Act and the Foreign Liquor Rules made thereunder govern sales of these intoxicants and Form F.L.3 applies to bars which sell foreign .liquor for consumption on the premises.

On April 25, 1964, the Government, by virtue of its powers under the Act, amended in certain respects the Foreign Liquor Rules.

One such amendment concerns the scale of fees in respect of licence in Form F.L.3, an upward revision having been effected. The rule itself, although promulgated on April 25, 1964 was given effect re- D trospectively from April 1, 1964. Apart from raising the rates. Rule IV was also amended by the addition of the (ollowing provision at the end of it :

"The licensee shall be hablc to pay the difference of fees per bottle on the balance of stocks of foreign liquor in the event of the enhancement of the scale of fees during the currency or on expiry of the licence.'

Based on this modification of the rules, the State made the demand for the difference.

Let us examine the rival contentions and test the soundness of each briefly. First of all, we have to ascertain the scope and area of the rule-making powers, the limitations thereon and the retro-active operation of such rules. There is no doubt that unlike legislation made by a sovereign legislature, subordinate legislation made by a delegate cannot have retrospective effect unless the rule-making power in the concerned statute expressly or by necessary implication confers power in this behalf. Our attention has been drawn to ss.62 (g) and

(h) and 63 in this connection, by counsel for the State. The State G Government may make rules for the purpose of carrying out the provisions of the Act (s.62). Such rubs may regulate the amount of fee, the terms and conditions of licences and the scale of fees and the manner of fixing the fees payable in respect of such licences [62

(g) and (h)].

This provision, by itself, does not expressly grant power to make retrospective rules. But s. 63 specifically states that 'all rules made and notifications issued under this Act shall be published in the Official Gazette, and shall have effect from the date of such publication or from such other date as may be specified in that "

behalf.' Clearly the Legislature has empowered ils delegate, the State Government, not merely to make the rules but to give effect to them from such date as may be specified by the dekgate. This provision regarding subordinate legislation does , contemplate not merely the power to make rules but to bring them into force from any previous date.

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Therefore antedating the effect of the amendment of Rule IV is not obnoxiou• to the scheme nor ultra vires s.62.

The focus must now turn on the disposal of the balance stocks

with licensees held on the expiration of the period. Rule XXV (') regulates the disposal of such balance of intoxicants left with vendors after the expiration of their licences; if they get new licences on the B expiry of the old in respect of the same premises, they are allowed to retain the balance of stock for the purposes of the new licence [r. XXV (a)]. In the event of the fee or duty being enhancee or reduced, r. XXVI makes such change applicable to the balance of stock. It is useful to reproduce r .. XXVI here :

"XXVI. Procedure to be followed when duty is enhanced or C reduced.

If it is notified by the Collector that from any particular date the duty leviable on any intoxicants is to be enhanced, all licensed vendors in possession of such intoxicants shall, on the evening preceding that date, dep'osit their . stock with such persons as the District Excise Officer may appoint for the purpose. Sqch stocks shall remain in deposit until verified and the District Excise Officer may order that the difference of duty be levied on. the balance of the stocks, and the licensee shall then pay such duty within thirty days of the date on which the enhanced rare

of duty comes in!o force :

(a) Provided that if such stock, or part of such stock, be destroyed, the difference of duty shall not be levied on the stock destroyed; and

(b) Provided also that if the balance of stock so deposited is transferred to another licensed vendor, the difference of F duty shall be levied from the transferee before the transfer is completed.

The above procedure regarding the deposit and verification of stock of intoxicants consequent on the enhancement of duty shall also apply when duty leviable on any intoxicants is reduced. Refund of the difference in duty con- G sequent on the reduction in its rate may be sanctioned by the Excise Commissioner on receipt of an application from the licensee through the Collector of the district."

A fair reading of this rule yields only one result. The licensed vendor in possession of surplus intoxicants on the eate preceding expiry of his licence should ordinarily deposit such stock with the appointed Excise Officer. On verification of the actual quantity of such stock, H the District Excise Officer 'may order that the difference of duty be levied on the balance of stocks, and the licensee shall then pay such duty ...... '. Of course, the above procedure primarily visualizes. enhancement of duty. but is made. applicable to reduction of duty when

( 1 Under the General Licence Conditions under s. 62.

A refund of duty shall be made by the State. Rule IV virtually extends this kind of dealing with balance of stocks when the subject matter is license fee as distinguished from duty. Moreover, licensees are "'

bound by the general licence conditions (vide condition No. 6 of the license) and the general licence conditions with which we are concerned are set out in rr. XXV and XXVI already adverted to.

In this background of the law, the short question is whether the respondent is liable to pay enhanced fee brought about by amendment of the rules on April 25, 1964.

The first contention that has been raised by the respondent in sup- C port of the judgment of the High Court is that in any case subordinate legislation cannot be retrospective and the State Government cannot therefore make rules and give effect to them retroactively. We have

already set out the provisions of ss. 62 aud 63 bearing on the subject and have no doubt that, in the present case, the statute does authorise the State, as its delegate, to make retroactive rules. Therefore we ne- D gative the contention that the enhanced levy of licence fee cannot operate as from April 1, 1964.

The second contention which has found favour with the High Court is that the balance on hand on March 31, l 964 is covered by the license fee already paid and cannot therefore be subjected to the enhanced levy on April 1, 1964. There is a measure of absurdity in the ruk, if this be the construction. Indeed, the High Court itself notices that the words used to tax at a higher rate the balance of stocks would become redudant in r. XXVI. A fair reading of the rule giving full effect td the words used in r. XXVI of the Excise rules and the explanation added to r. IV (of the Foreign Liquor Rules already extracted) leave us in no doubt that the balance of stocks envisioned by the rules and subiected to enhancement or reduction of duty is such surplus stock as is held iunnediately before the expiry of the previous license. So construed, in this case the quantity held over on March 31, 1964 becomes liable to enhancement of license fee on April J, 1964 and that is precisely what the State has claimed.

G Indeed, commonsense suggests no alternative construction. For, otherwise, some persons who by accident have huge stocks left over will not have to pay the enhanced rate of licence fee while others with 'virgin' licences for that year and begin with no stock-on-hand have to pay at a higher rate. Again, if only the respondent had surrendered his surplus stocks on 31-3-1964, as ordmanly he would have had to had be not been permitted to retain that quantity in H view of his getting a fresh licence for the same premises, he would have had to pay the enhanced rate for such left-over stock. !h:-is, both law and logic, correct construction and commonsense, comc1de in the conclusion that the Eagle Cafe Bar owner (the respondent) had to pay the higher fee on the balance of stock as on April 1, ! 964.

The High Court erred in its interpretation of •the rules as applicable to the present situation.

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We allow the appeal but, having regard to the fact that the sum A involved is unsubstantial although the Higl> Court regards the question of law involved as substantial, we direct that the parties do bear their costs.

Appeal allowed.

STATE OF MADHYA PRADESH & ORS

TJKAM DAS

V. R. KRISHNA IYER

A. C. GUPTA, JJ.

Madhya Pradesh Excise Act

Foreign Liquor Rules

s. 63

IV of the Foreign Liquor Rules

Art. 133

Madhya Pradesh Excise Act, 1915

s. 63

s. 62

ss. 62