SASSOON J. DAVID & CO. (P) LTD., BOMBAY

C.I.T., BOMBAY

May 3, 1979

[N. L. UNTWALIA AND E. S. VENKATARAMIAH, JJ.]

Indian Income Ttx Act 1922-Section 10(2)(xv)-Scvpe of-Retrenchment compeTJ.Sation paid to emplOyees whose services were terminated-If an allowable deductiolt-"Wiwlly and exclusively" meaning of-Benefit to third party-Whether a consideradon for not allowing deduction.

In January, 1956 the assessee company whose assets had been valued at -·-_.'f Rs. 155 lacs as on December 31, 1955 decided to terminate the services of 22 ( of its employees with effect from 31st March, 1956 and to pay them retrenchment compensation and compensation for termination of employment. Thereafter Davids, who held the share~ of the company entered into an agreement with Taw to sell to them all the wares for Rs. 155 lacs. The agreement provided that compensation and grtuity payable to the Directors and employees whose :!ervices had been terminated and the annuity payable to the managing director should be deducted from the purchase consideration.

The assessee claimed deduction under s. 10(2)(xv) of the Indian Income Tax Act, 1922 of a sum of Rs. 1.64 laths paid by way of retrenchment compensation and compensation for termination of ervice during the assessment year 1957-58 and a sum of Rs. 16,885 which was tbe amount of annuity paid to the managing director in each of the three succeeding assessment years.

The lncome Tax officer disallowed the amounts on the ground that the services of the directors and employees had been terminated not as business expediency but became the purchaser~ of the shares made it a condition under

the agreement.

On appeal the Appellate Assistant Commissioner, affirming the view of the

. .-· •

Tncome Tax Officer, held that the decision to pay compensation could not be • Ji' said to have been taken solely with a view to the business requirement of the .......

company. , ---~

Dismissing the assessee's appeal the Appellate Tribunal held that the expensc.s had not been incurred for the purpose of the company but purely as a result of the bargain between Davids and Tatas and assuming that the paymen~ were beneficial to the assessees by reason of the reduction in its establishment expenes, no deduction could be ollowed under s. 10(2) (xv) since the payment wa~ made to the benefit of a third party.

Relying principally upon the decision of this Court in Gordon W oodroffee Leather Manufacturing Co. v. The Commr. of Income-tax, [1962] Supp. 2 SCR 211, the High Court held that the amount involved in the case did not satisfy the test applicable to the expeJlditure allowable under s. 10(2) (xv) of the Act and, therefore, disallowedthe expenditure of Rs. 1.27 lakhs out of a sum of Rs. 1.64 lakhs on the ground that it had not been incurred for commercial expediency. The High Court also disallowed the annuity paid to the managin! director in the succeeding three assessment years.

• ...

SASOON J. DAVID V. C.I.T. 879

Allowing the assessee's appeals

1:tF1D : 1 (a) The three tests Iai:d down by this Court in Gordon Woodroi/te'l case viz., (1) that the payment should have been made as a matter ot vractice which affected the quantum of salary, (ii) that there was an expectation by the employee of getting a gratuity and (iii) that the sum of money was expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee have to be read disjunctively. So read the present case which satisfied the third test fell under s. 10(2) (:xv) of the Act. The High Court was in error in holding that the amount in question did not satisfy any of the test> applicable to the expenditure allowable under the section.

[893H]

(li) In order to claim deduction under the section an assessee has to show that the expenditure in question (1) was not an allowance of the nature described in any of the clauses (i) to (xiv) of the section, (ii) was not in the nature of a capital expenditure or personal expenses of the assessee and (iii) bad

been laid out or expended wholly and exclusively for the purposes of his business, profe!!Sion or voca!lon.

[891G]

(c) l!.'fen assuming that the motive behi, d the payment of retrenchment cotion was that the terms of the agreement of the sale of shares should

be satiified, 1111 long as the amount had been laid out or expended wholly and ciclllirively for the purpose of the business of the assessee there could be no

aood rea30n for denying the benefit of this section if there was no other imptdiment to do so. [89tH]

In the instant case the assessee company was neither diliSolved nor was its business undertaking sold. It continued to exist as a juristic entity and continued to function even after the transfer of its shares to Tata.s. The expenditure was

laid out for the purpose of the assessee company's own trad'e and not for the trade of Tatas who were only shareholders of the company.

As a result of the expenditure the company was benefited and it was pos9ible for it to eam more profits as a. cOnsequell(:e of the reduction in the wage bill. It cannot be said that Tatas were in any way benefited financially by reason of reduction ia the ooMideration payable by them for the shares.

[893B-C]

Gordon Woodroffae Leather Manufacturing Co. v. The Commissiontr of Incmrw-tax, Madras, [1962] Supp. 2 SCR 211, applied.

(i) Commissionrr of Inland Revenue v. Patrick Thomson, Ltd. (in Liquidation), G

(ii) Commissioners of Inland Revenue v. J. & R. A.Ilan, Ltd. (In liquidation),

(iii) Commissioners of Inland Revenue v. Pattigrew & Stephens, Ltd., 37 T. C. 145, referred to.

Commissioner of Income-tax, Gujarat v. Laxmi Cement Distributors (P) Ltd., 104 ITR 711, Commissioner of Income-tax, Bombay City I v. Fairdeal Corporation (P) Ltd., 108 ITR 280; Commissioner of Income-tax, Bombay City I v. Patel Cotron Co. Pvt. Ltd., 108 ITR 846; approved.

(d) Moreover it is too late in the day whatever might have been the pOOition about two decades ago, to treat the expenditure incurred by the management in paying reasonable sums by way of gratuity and retrenchment compensation or compensation for termination of services as not business expenditure.

Such expenditure would ordinarily fall within the S<:Ope of s. 10(2) (xv) of the Act.

[889C]

2. The argument that since there wa~ no necessity to retrench the &ervices of all the employees, the expenditure could not be treated as ane laid out wholly and exclusively for the purpose of bwiness has no force.

Th'e expression "wholly and exclusively" does not mean "necessarily". Ordinarily it is for the asseee to decide whether any expenditure should be incurred in the course of his or its busin'ess.

Such expenditure may be incurred volU!ltarily and without any necessity and if it is incurred for promoting the business and C to eam profits the assessee can claim deduction under the section even though there was no comp'c:lling necessity to incur such expenditure.

The fact that somebody other than the as9essee wali also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under the section, if it satisfies otherwise the test laid down by law.

[894D<J]

In the instant case the company thought that its buiness could be carried on with a smaller numb'er of employees and the only wa.y to reduce the number was to terminate the services of all employees by paying compensation a~ to re-employ only some of them.

Thereby the company reduced its txpenditure on wages payable to its employees. It could not therefore be said that compensation was paid . with an oblique motive and without regard to commerciiil considerations or expediency.

[895F]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2501 of 1972.

From the Judgment and Order dated 5-2-1970 of the Bombay High Coul"t in Income Tax Reference No. 58/73 ..

AND

CIVIL APPEAL NOS. 2502-2504 OF 1972

From the Judgment and Order dated 25thj26th Feb. 1971 of the Bombay High Court in Income Tax Ref. No. 87 f63.

V. S. Desai, Dinesh Vyas, K. 1. John and Sree Narain for the Appellants in all the appeals.

HardyaJ Hardy, Champat Rai, B. B. Tawekley and Miss A Su, hashini for the Respondent in all the appeals.

The Judgment of the Court was delivered by

B VENKATARAMIAH, J.-Since these appeals by certificate involve a common question of law, we find it convenient to dispose them of by this common judgment.

SASOON J, DAVID V. C.I.T. (Venkataramiah, J.) 881

 .. Civil Appeal No. 2501 of 1972 is filed against the Judgment of the High Court of Bombay in Income Tax Reference No. 58 of 1963 and Civil Appeals Nos. 2502-2504 of 1972 are filed against the judgment of that High Court in Income Tax Reference No. 87 of 1965.

The assessee, M/s Sasoon J. David & Co. Pvt. Ltd. (hereinafter referred to as 'the Company') is the appellant in all these cases and the assessment

yean e 1957-58, 1958-59, 1959>60 .and 1960-61, the relevant calendar years being 1956, 1957, 1958 and 1959 respectively .

..,..

The Company is an investment company and its shares were origi- '1" nally heJd either directly or through their nominees by Sir Percival David, Lady David and Mr. V. P. David (hereinafter collectively referred to as 'Davids') .

The issued capital of the Company consisted of 1000 ordinary shares of the face value of Rs. 10,000/- each.

According to the valuation made by the auditors, the assets of the Company were worth Rs. 155 lacs as on December 31, 1955.

At a meeting of the directors of the Company held on December 2, 1955, a resolution was passed recommending that the employees of the Company whose nameS

were ret out in the statement attached thereto be paid certain sums or annuity as set out against the names of each of them as and by way of retrenchment compensation and compensation for termination of employment and also for long and faithful services rendered by them to the Company in the past and that their services might be terminated.

It was. also resolved to call an extra-ordinary general meeting of the shareholders of the Company to consider and if thought fit to approve the recommendation made by the directors as stated above.

Accordingly •

an extra ordinary general meeting of the shareholders of the Company wa$ held on January 17, 1956 but it was adjourned to January 25,1956.

( On the adjourned date, the meeting passed a resolution approving the reccmunendation made by the directors to pay the employees retrench.; ment COmpensation and compensa-tion for termination of employment and alro additional retrenchment compensation and compensation for termination of employment in the case of some of them and to terminate their services on or after April 1, 1956.

Thereafter an agreement was entered into between Davids and Tata Sons Ltd. (hereinafter referred to as 'the Tatas') on March 23, 1956 agreeing to sell the 1000 shares held by Davids or their nominees in the Company in favour of Tatas or their nominees for a sum of Rs. 155 lacs. The said agreement inter alia provided that the sum voted by the Company for payment of gratuities and/ or as compensation for loss of employment to existing directors and employees of th~ Company with respect to their services upto and inclusive of March 31, 1956 and a further amount of

SUPREME COURT REPORTS [1979] 3 S.C.lt..

R~ . 16,188/- payable to the Managing Director, Mr. Mathalone lhould' be paid in accordance with the resolution by the Company and tke amount so paid should be deducted from the purchase price of Rs. 155 lacs agreed upon.

It also provided that Davids should arrange to terminate the services of all employees with effect from March 31, 1956 and also to arrange that all directors (including the Managing Director) resign their offices and Tatas or their nominees should thereafter be entitled to appoint or elect all or any of the members of the staff and directors (including existing directors and members of the staff) of the Company as they deemed fit.

Of the 22 employees covered by the resolution of the directors dated' December 2, 1955 followed by the confirmation at the extra-ordinary general meeting of January 25, 1956, 9 were re-employed and 13 persons. were not re-employed.

In the books of the assessee, there was a debit for a total sum of Rs. 1,64,899/- during the accounting year 1956, the

details for which were as follows :-

Amount payable to the 22 employees as per resolution dated

2-12--1955 and 25-1-1956 R 1,01.,626{-

Amount described as "additional retrenchment compensation

and compensation for termination of employment and also

forlongandfaithfulservices", as per resolution No. 2dated

25-1-1956 Rs. 6.000/·

Compensation for termination of pension allowance Rs. 21,200 .

Annuity ofShri A. E. Joseph, former Director as per resolutions dated 2·12-1955 and 25-1-1956 .

Rs . 16,885/-

Amount described as "compensation for loss of office. Managing

Director Mr. R. Mathalone." Rs. 16,1&8/-

Total: Rs. 1,64,899/-

It should be mentioned here that A.E. J dseph, the former Director of the Company had to be paid as per the resolution of the Company Rs. 16,885/- by way of annuity during a period of five years commencing with 1956.

During the assessment year 1957-58, the relevant previo~ year being 1956, the Company claimed deduction of Rs. 1,64,899/- referred to above before th~ Income-tax Officer under section 10d2)(xv) of the

• _.)

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SASOON J. DAVID v. C.l.T. (Venka'tatamiah, J.) 883'

1ndian Income-tax Act" 1922 (hereinafter referred to as 'the Act').· During each of the three succeeding assessment year's with which we

are concerned, the Company claimed deduction of Rs. 16,885/- being the annuity pid to Mr. A. E. Joseph pursuant to the resolution.

During the assessment year 1957-58, the claim in respect of the entite sum of Rs. 1,64,899/- was disallowed-by the Income-tax Officer on the ground that the services of the directors and employees had been tenninated not because of business expediency but because Tatas, the purchasers of the shares made it a condition under the agreement. The relevant part of the order read as follows :-

"Thus, it emerges that tlJ.~ expenditure of the type of gratuity would be allowable u/ s 10(2) (xv) only if the persons retiring had such expectancy or they accepted lower salaries in such expectation and hnce it was an incentive to existing employees of future employees.

As against that we find that here even before the Tatas took up the management of the company, services of the employe~ and directors were terminated and the amount of compensation fixed.

The fact that there was no expectancy or custom of such gratuity with the company is clearly borne out by the fact that tnany of the employees whose services arc. terminated had put in a number of years of service in some case6 even going upto 40 years.

As against this the assessee has been pleading that most of the employees were very old and tha:t as a result of change of staff the Company was able to effect considerable economy.

However, I understand that some of the old employees were reinstated and as stated the whole transaction was a part of the overall transaction of purchase of shares and passing over of control.

The manner in which the services of all the employees tinder the old management were terminated is also significant. Thus I am unable to see how this expenditure can fall u/s. 10(2) (xv). I am unable to find any distinctin ret.ween compensation paid to employees and .those pmd to drrectors and also any distinction between

ou~1ght compensation paid to a director and annuity paid to a drrector. None of the expenses are allowable and I add the whole amount claimed by way of gratuity, compensation for loss of empl.oyment and annuity or compensation for loss of office to a dtrector or former director."

. Aggrieved by the decision of the Income-tax Officer, the Company filed an appeal before the Appellate Assistant Commissioner of

Incometax. The Appellate Assistant Commissioner after taking into account the records before the Incometax Officer and the statement filed by the Company refore him found that the Income-tax Officer was right in disallowing the claim even though he was of opinion that the Company had by the termination of services of the directors and the employees by payment of gratuity and/or comp:!nsation been bene fited.

The relevant part of his order was as follows:-

'The o'nly contention remaining to be considered is that the Income-tax Officer was wrong in disallowing a sum of Rs. 1 ,64,899 Ipaid to certain employees and directors aa compensation for termination of services.

The circumstances leading to the payment of this compensation have en narrated in detail in the order of the Income-tax Officer.

It is strongly urged that the termination of the services of the persons concerned was of great benefit to the Company even considering the payment of the compnsation since the establishment expehses were very substantially reduced as a result.

From the information furnished to me, this statemrnt is no doubt quite justified.

However, it is seen that the termination of the services and the payment of compensation were not done wholly with a view to the business requirements of the company, but wrc bound up with the cha'nging of hands of the shares of the company.

According to the agreement for the sale of all the shares of the company the selb-s had to arrange to terminate the services of all the employees and also arrange that all directors resigned their offices.

It is expressly stated that this requirement was to enable the purchasers to appoint or elect all members of the staff and directors.

As a matter of fact some of the persons to whom compensation had been paid for termination of service5 were immediarely re-employed by the Company. The decision to pay compensation cannot in the circumstances be said to have been taken solely with a view to the business requirement of the company though incidentally the company might have been benefited by it. In view of what has reen stated above.

I feel that the Income-tax Officer was justified in his action.

The appellant has referred to the Bombay High Court decision in the case of F.E. Dinishaw Ltd., but the facts in the present case are not identical with those of the case mentioned."

On further appeal to the Tribunal by the Company, the Tribunal affirmed the order of the Appellate Assistant Commissioner ho1di'ng

.. r 41

SASOON J. DAVID v. C.l.T. (Venkataramiah, J.) 8'85

that .the inference drawn by the Incometax Officer that the payments in question were motivated by the reorganisation of share-holding had not been chaUenged by the Company; that the reference made to the said payments in the agreement of .sale of shares led to such an inference and that the expenditure had not been incurred for the purpose of the Company but purely as a result of the bargain between Davids and Tatas. It was further held by the Tribunai that even assuming that the paymnts were beneficial to the Company, no deduction could be allowed since they had been made to benefit third parties.

Accordingly the Tribunal dismissed the appe.al.

An application made under section 66(1) of the Act before the Tribunal was rejected.

Thereafter the Company filed an application before the High Court of Bombay under section 66(2) of the Act and

the High Court directed the Tribunal to state a case and to refer the following questions of law for its opinion:-

" ( 1) Whether the Tribunal erred in law disallowing the D amount of Rs. 1,64,8991as a deduction under section

10 of the Indian Income-tax Act, 1922 ?

(2) Whether there was any evidence to justify the Tribunal's finding that the payment of Rs. 1,64,899/- or any part thereof was made in view of and in order to effectuate E the agreement entered into between the old shareholders and the new shareholders and that the payment had no commercial purpose behind it ?

(3) Whether in any event the sum of Rs. 16,188/~ paid to the Managing Director by way of pay in lieu of six Jl' months' notice was all.owable as a deduction under section 10 of the Indian Income-tax Act, 1922 ?"

Accordingly, the Tribunal drew up a statement of the case and referred the abov~ questions.

Later on the Tribunal referred tinder section 66 (1) the following question of law arising out of the orders G of assessment for the assessment years 1958-59, 1959-60 and 1960- 61 in respect of the annuity paid to Mr. A. E. Joseph:-

"Whethe~ in computing the assessee's business income of the accounting years 1957, 1958 and 1959, relevant for the assessment ars 1958-59, 1959~60 and 1960~61, the .H sum of Rs. 16,885/- is an admissible deduction under section 10{2) (xv) of the Act?

A , It is n9t n.e.cessary to refer to the other matters involved in the

orders of assessment of the years 1958-59, 1959-60 and 1960-61 and to the various stages of the cases until they reached the High Court.

Income-tax Reference No. 58 of 1963 arising out of the assessment proceeding~S of the year 1957-58 was heard by a Division Bench of the High Court of Bombay and decided on February 5, 1970. The High Court found that out of Rs. 1,64,899/- referred to in question No.1 only a sum of Rs. 21,200/- which was commutation of liability for payment of pension to some retired employees and/or widows of such employees and a sum of Rs. 16,188/- paid to Mr. Mathalone, Managing Director in lieu of six months notice that had to be given prior to termination of his service were allowable as deductions and that the Company was not entitled to claim deduction of the remaining sum of Rs. 1,27,511/-. It according)y answered question No.1 in the negative in so far as the sum of Rs. 1,27,511/- (excluding two

items of Rs. 21,000/- and Rs. 16,188/-) was concerned, question No. 2 in the affinnative in so far as the amount aggregating to Rs. 1,27,511/- (excluding the two items of Rs. 21,200/- and Rs. 16,188/-) was concerned and question No. 3 in the affirmative.

The High Court was of the view that the expenditure of the sums amounting to Rs. 1,27,511/- paid to the employees and a director of the Company by way of retrenchment compensation or compensation for termination of service had not been incurred by the Company for commercial expediency and/or considerations. It accord1ngly disallowed the claim made by the Company to the extent indicated above.

The Income-tax Reference case arising from the assessme'nt orders relating to assessment years 1958-59, 1959-60 and 1960-61 came before another Division Bench of the High Court and that Division Bench following the decision rendered by the High Court earlier disallowed the claim of the Company for deduction in respect of the payment of Rs. 16,885/- to Mr. A E. Joseph in each of the accoonling years relative to the assessment years in question. Aggrieved y the judgments of the High Court of Bombay, the Company has filed these appeals.

We are concerned in these appeab with the claim of the Company in respect of a sum of Rs. 1,27,511/- out of Rs. 1,64,899/- referred to in questions Nos. 1 and .2 in the reference relatmg to the assessment B year 1957-58 and the claim in re5pect of payment of Rs. 16,885/- made to Mr. A. E. Joseph during each of the three succeeding yean;.

The undisputed facts of the case are : The shares of the. Company

~N J. -DAVID .v. C.U. (Venkataramiah, I.) 887

-were held by Davids or their nominees till they were transferred to

Tatas; that according to the valuation made by the auditors of the Company, its assets were worth Rs. 155 lacs as on December 31, 1955; that -t a meeting of the directors held on December 2, 1955, it had been resolved that the services of 22 employees should be terminated by paY, ing retrenchment compensation; that on January 25, 1956 al the extra-ordinary general meeting of the shareholders of the Company, it was resolved that the employees of the Company be paid certain

SUll1S or annuity set out against the names of each of them and their services should be terminated with efkct from April 1, 1956; that an •) agreement was entered into between Davids and Tatas on March 23,

T - - 1956 rgarding the J; ale of the shares in favour of the Tatas; that the \ uid agreement referred to the resolution passed at the meeting of the '

shareholders of the Company; that the Company paid retrenchment compensation according to the said resolution and that the Tatas dedtlcted from the purchase price the sum payable by the Company in

accordance with the resolution of the Company from out of the con aideration of Rs. 155 lacs which they had agreed to pay under tho agreement dated March 23, 1956 to Davids.

Apart from the resolution of the Board of Directors of the Company dated Decmber 2,

1955, the resolutions passed at the extraordinary general meeting ol the shareholders of the Company held on January 25, 1956, the agree-- meat dated March 23, 1956 entered into between Davids and Taw, 1he Jx>oks of aceount of the Company showing payments made by the Company by way of retrenchment compensation and the fact that 9 "the 22 employees whose services had been terminated had peen reployed, there was no other evidence before the Income-tax Officer.

The Income-tax Officer presumably because of the proximity of the

~~ 9f Jhe resolutions, the date of the agreement and the dates on / .,., rucb retrenchment compensation was paid to the employees came 1 _ to the conclU8ion that the rtrenchmen_t of the employes had lx:en ,. -etfocted as a part of the bargain entered mto between .Oav1ds .and Tata~

and therefore compensation pai4 to the employees on retrenchment of their services and to the director on the termination of his service had

aot been paid in the course of the business of the Company by way of commercial expediency.

He accordingly disallowed the claim of the Company under section 10(2)(xv) of the Act. Although the Appellate Assistant CommiS8ioner in the course of his order observed that the Company had been benefited by reason of the retrenchment of the ienices of the employees as it had resulted in the reduction of the e.:penditure on the establishment, he disal1owed the claim on the very

i~ .ground on which the Income-tax Officer had rejected it. The Tr:ibu, pal proced .to dispose of tbe case before it on e basis that

SUPREME COURT REPORTS [1979] 3 S.C.ll.

the inference drawn by the Income-tax Officer that the payments were motivated by the re-organisation in the shareholding had not . been questioned by the Company either before the Appellate Assistant Commissioner or before it.

We do not find in the order of the Appellate Assistant Commissioner that any concession had been made by the Company to the effect that the finding of the Income-tax Officer referred to above was correct. In the grounds of appeal before the Tribunal, the Company had stated that the Appellate Assistant Commissioner erred in holding that "the decision to pay compensation cannot in the circumstances be said to have been taken solely with a view to the business requirement of the Company though incidentally the - Company might have benefited by it." The appellants submitted be-- fore the Tribunal that the above amount was expended wholly and exclusively for the purpose of their business and as such it should have ocen deducted as an admissiable expense in computing their i'llcoe

liale to income-tax.

The Tribunal while deciding the question whether the sums paid by way of compensation were deductible or not observed that the fact that a reference to payment to the staff of compensation had been made in the agreement led to the inference that such payment was a part of the bargain between Davids and Tatas;

-..__

that on account of such payment, the purchasers had actually been

benefied while the Company had to make payment in order to give effect to the agreement and therefore there was no commercial purpose involved in making the said payment. The Tribunal also held that even assuming that the Company was benefited by payment of compensation by reason of reduction in its establishment expenses, since the payment had been made as a result of the bargain between Davids and Tatas, it could not be allowed as a deductible expenditure ..

It should be stated here that the Tribunal did not reverse the finding of ', 1 the Appellate Assistant Commissioner that the Company had been -~ b.::nefited by such payment. In fact it did not go into the question whether the payment had really resulted in any benefit to the Company.

The High Court, however, in the course of its judgment found that on account of the retn:nchment of the employees and re-emp!oyment of only 9 of them. the yearly wage bil1 of the Company for salaries was reduced from Rs. 1,14,197/- in 1955 to Rs. 67,268/- in 1956 and thereaftt>r in 1957 ::<nd 1958 respectively to Rs. 54,124/- and Rs. 54.960/-.

I'n the instant case, it is no:-:cessary to bf'ar in mind that the Companv w::s neither dissolved nor was its business undertaking sold . . It continued to exist as a juristic entity even after the transfer of it!!

\7T J .--

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•. :.,:-----

SASOON J. DAVID V. C.I.T. (Jienkatarpmiah, /.) SSg

har~ by Davids to Tatas. . On account of such transfer of shares A e transferees no doubt gained control on the Company. But on~

important fact of the case which was lost sight of by the High Court

'- I l .

and the Tribunal was that neither Davids nor Tatas derived any direct benefit out of the payment of retrenchment compensation to the employees even though such retrenchment might have facilitated the B transfer of shares. It is also not the case of the Department that the payment was excessive. That there was a substantial reduction in the wage bill in the future years as a consequence of retrenchment was also not disputed. It is too late in the day now, whatever may have been the position about two decades ago, to treat the expenditure incurred by a management in paying reasonable sums by way of gratuity, bonus, retrenchment compensation or compensation for temJination of service as not business expenditure. Such expenditure would ordinarily fall within the scope of section 10 (2) (xv) of the Act which authorised the deduction of any expenditure not being in the nature of capital expenditure or personal expenses of the assessee laid out of expended wholly and exclusively for the purpose of business or profession or vocation.

The Higlt Court, bov.o::ver, declined to allow the deduction of the sums referred to above in these cases principally relying upon the decision of this Court in Gordon Woodrof!ee Leather Manufacturing

Co. v. The Commissioner of Income-ta.x, Madras('). The facts of that case were briefly thus : One J. H. Phillips was the Director of the assessee Company in that case from the year 1940. On March 22, 1949, he wrote a letter to the assessee expressing his intention to

re~; i~ from its Board as from April 4, 1949 and requested that his resignation be accepted.

On March 24, 1949, the Board of Directors of the assessee passed a resolution that his resignation be accepted and in appreciation of his long and valuable services to the assessee he be paid a gratuity of Rs. 50,000/- out of which the nss-ssee was to pay • Rs. 40,000/· and its Managing Agent was to pay Rs. 10,000/ -. Subsequently the resolution was approved at the extra-ordinary general IIlecting of the assessee.

Accordingly a sum of Rs. 40,000/- was paid by the asscssee to Mr. J. H. Phi:tipc;.

The assessee claimed deduction , of the 5aid sum of Rs. 40,000/- under section 10(2) (xv) of the Act.

e Income-tax Officer as well as the Appcl!ate Assistant Commis lloncr disallowed the said claim on the ground that the Company had no pcnion 6cl"r:me; that the payment was voluntary and that the entry in the assessee's books clearly indicated that the payment was ---

(1) {1962) Supp. 2 S.C.R. 211.

: ~

1 ;

a capital payment.

The Tribunal upheld the order of the Appellate Assistant Commissioll'r. It held that accordin& to the resolution .the

gratuity was paid "for long and valuable services to the assC~See", that there was nothing to indicate that Mr. J. H. Phillips had ad<:epted a lowr salary in expectation of getting a gratuity at the. end of his service; that there was no such practice in the assessee..compa'ny; that during the course of his servic~ he was being remunerated at a graduated scale of salary and a commission of 2!% on the profits; that there was no "expectancy" that at the end of the service there wollld

be recompense for faithful and efficient service and that he had been suitably rewarded by being given a commission oil the profits "in oi:der G to whip up his enthusiasm". It was als() found by the Tribunal that in the books of the assessee, the amount had not been debited in the profit and loss account but was debited to the appropriation account thereby indicating that it was an extra payment or a payme11t made in the nature of a capital expense.

On a reference under sec- 8 tion 66(1) of the Act, the High Court of Madras answered the question relating to the above item of expenditure against the aSBessee. On appeal, this Court affirmed the decision of the High Court.

While holding that the claim made by the assessee did not satisfy the proper

tests for claiming exemption under section 10(2) (xv) of the Act, this Court observed as follows:- •

"In our opinion the proper test to. apply in this case is, was the payment made as a matter of practice which affected the quantum of salary or was there an expectation by. the employee of getting a gratuity or was the sum of money ex- ·

pended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. But this has not been shown and therefore the amount claimed is not a deductible item under s. 10(2) (xv) ."

After quoting in the course of its judgment the above passage, the High Court proceeded to observe as follows :-

"Having regard to the test applicable in connection with the contentions made by Mr. Palkhiwala, what required to be investigated is whether the payments in question were made as a matter of practice which had affected the quantum of salary or whether there was an expectation by the employees (whose employment was terminated) of getting a gratuity or, . in the alternative, the above sums were expended on the

• ..

SASOON ~. DAVID V. C.I.T. (Venkataramiah, J.) 891

grc;:mnd of commercial expediency and in order indirectly to A facilitate the carrying on of the business."

After making the above observation, the High Court held that the Company had not placed any evidence to show that there was a practice

in the Company to pay compensation even though its attention was drawn that in the past i.e. between 1946 and 1952, the Company had paid such compensation in two cases on the basis of one monthts basic salary for each year of servke. It also rejected the case of the Company that th~ amount involved had been expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the Company even though it observed that the

iedy wage bill of the Company was reduced after such payment. The High Court held that the consideration of reduction of the wage bill

a"s foreign to the decision taken by the Company to terminate the

seyices of the employees and to pay them retrenchment compensation and observed that the purpose of the payment so far as could be ascertained from the contents of the resolutions of the Board of Directors and the Company when read with the relevant contents of the agreement for sale was the carrying out of the. obligation arising under the agreement. It also held that the fact the expenses became reduced was

ifficient to record a finding that the amount of retrenchment compensation was paid for commercial considerations or expediency, From

the, perusal of 'the judgment of the High Court it becomes cJear that th'e High Court placed more emphasis on the motive with which the

mounf was expended than the fact that the expenditure had been . incurred in connection with the business of the Company and that such

~ expenditure resulted in the reduction of the annual wage hill of the

~- Compey in the future years. .

In order to claim deduction under section 10(2) (xv) of the Act, an assessee has to show that the expenditure in question (i) was not an alloance of .the nature described in any of the cJauses (i) to (xiv)

. G of section 10(2); (ii) was not in the nature of a capital expenditure

or peto.Qa, J epeuses of the assessee and (iii) had been laid out or expende<; I whotly and exclusively for the purposes of his business, profession or vocation.

Even assuming that the motive behind the payment ofretrenchment compensation was that the terms of the agreement of the sale of shares should be satisfied, as long as the amount had been B laid out or expended wholly and exclusively for the purpose of the business of the ass~SSC() , there appears to be no good reason for denying

t\ the benefit of section 10(2) (xv) of the Act to the Company if tilere is no other impediment to do so.

The facts of these cases are very close to the facts found in {i) Commissioners of Inland Revenue v. Patrick Thom8on Ltd. (in liquip dation), (ii) Commissioners oj Inland Revnue v. J. & R. Allan, Ltd. f. (in liquidation), (iii) Commissioners of Inland Revenue v. Ptte>, p

& Stephens Ltd. C). The respondent-companies in the said u~ were subsidiaries of a Company called Scottish Drapery Corporati!Nl Ltd., the control of which was acquired by the House of Fraser Ltd.

Changes of organisation which were made in accordance with the policy of the House of Fra, ser Ltd. involved the termination of the contracts of service of the Managing Directors of the respondent-companies and also the eventual liquidation of those companies.

Certain sums were paid by the companies to the managing directors in connection with the <>ancellation of their contracts, the payments being expressed in the first two cases to be in satisfaction of rights to future remuneration, and in the third to be. in lieu of notice.

Before the Special Commissionen, the companies contended that the payments made by them to the

Managing Directors in connection with the cancellation of theit eofl:.. tracts had been made to relieve them from onerous contracts and were allowable deductions.

The Crown contended that the payments were not exnses of the companies' businesses t were incidental tO the schemes by which those businesses were acquired by the House ef Fraser Ltd. and were made primarily for the benefit 0f that rompaay~ The Commissioners, however, decided that the deductions claimed wepe

allowable. Upholding the findings of the Commissioners, the Lord Presideat observed at page 156 :-

"In my opinion the contention put forward by tbe Crown is unsound and the Special Commissioners were correct in rejecting it.

Admittedly in this case tto question arises in regard to the words "wholly and exclusively", and if the Crown's contention is unsound it is not disputed that the disbursement in question falls within section 137 (a). To succeed in their contention the Crown must establish two matters. In the first place it must show thai the liquidation involved a discontinuance of the trade carried on prior to it by the Respondent Company and the subsequent operation of a new trade carried on by House of Fraser. In the second plac_e it must show that the expenditure in question was laid

(1) !7 T.C. 14~.

,. ••

[ l

SASOON J. DAVID v. C.J.T. (Vtnkataramiah, /.) . 893

out fo~ the purposes ?f the new trade. Without both these . steps, tts a:&nment fails. In my opinion neither step in the argument IS made out."

In the present case also, it is seen that the Company continued to function even after its control passed on to the bands of Tatas and the expenditure in question was laid out for the purpose of the Company's own trade and not for the trade of Tatas who were only the shareholders of the Company. We cannot overlook the distinction between the Company and its shareholders. As a result of the expenditure in question, the Company was in fact benefited and it was possible for it to earn more pr:ofits as a consequence of the reduction in the wage bill. It was suggested in the course of the armeots before us that Tatas were actually benefited by the payment in question because the price payable by them for the shares was reduced by the amount spent by the Company. We do not find any substance in this contention.

Admittedly the assets of the Company bad been valued as on December 31, 1955 at Rs. 155 lacs. Naturally the total value ot the shares of the Company would be Rs. 155 lacs which Tatas had agreed to pay.

Subsequent to December 31. 1955, the Company had by passing the resolution incurred the liability to pay retrenchment compensation and compensation for termination of service as stated above. On account of the said resolution, the total value of the assets of the Company was reduced by the amount payable to the employees by way of compensation. It is nat11ral that the purchaser of the shares would ordinarily claim reduction in the consideration payable for the shares by the amount which the Company had undertaken to pay 8ll assets of the Company became reduced to that extenl It cannot, therefore, be said that the Tatas were in any way benefited financially by reason of the reduction in the consideration payable by them ("f the shares. We feel that the expenditure in respect of which deduction is claimed by the Company in this case fal]j within the third test laid down by this Court in the caso of Gordon Woodroffu Ltather Mllllu/acturlng Co. v. The Commissioner of Income--ta.t Madras (supra) viz. that the sum of money had been expended n the ground of commercial exped}ency

and in order indirectly to facilitate the carrying on o~ the bumess~ Wo are of the view that the three tests laid down by this Court 10 th above case viz. (i) that the payment should have been made as a matter ot practice which affected the quantum of salary; (ii) th~~. there was an . t 'ty and (m) that the expectatJGn by the employee of getting a gra w . sum of money was expended on the ground of commercial .exped•ency

a d • . . . • or the busme!s of the n tn order mdtrectly to faclhtate the carrymg oa

"''I I

SUPREME COURT REPORTS

[1979] 3 S.C.R.

A.' assessee have to be read disjunctively and if they are so read, the present case .which satisfies the third test should be held as falling under section 10(2) (xv) of the Act.

The High Court -of Gujarat in Commissioner of Income-tax, Gujarat v. Laxmi Cement Distributors •

Pvt. Ltd. ( 1 ) and the High Court of Bombay in Commissioner of Income-tax, Bombay City I v. Fairdeal Corporation Pvt. Ltd. (2) and in Commissioner of Income-tax, Bombay City I v. Patel Cotton Co. Pvt.

Ltd.(') have also understood the principle underlying the decision of_ this Court in Gordon Woodroffee Leather Manufacturing Co. v. The Commissioner of Income-tax, Madras (supra) in the same way.

The High Court was, therefore, in error in holding that the amount involved in the case did not satisfy the test applicable to the expenditure allowable under section 10(2) (xv) of the Act.

The next contention urged on behalf of the Department was that since Davids and Tatas were indirectly benefited by the retrenchment of

the services of the employees of the Company and payment of compensation to them and since there was no necessity to retrench the services of all the employees, the expenditure in question could not be treated asan expenditure laid m1t wholly and exclusively for business purposes of the Company. It has to be observed here that the expression "wholly

and exclusively" used in section 10(2) (xv) of the Act does not mean 'necessarily'.

Ordinarily it is for the assessee to decide whether any expenditure shoul~ be incurred in the course of his or its business.

Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits~ the assessee can claim deduction under section 10(2) (xv) of the Act even though there was no compelling necessity to incur such expenditure.

It is relevant to refer at this stage to the legislative history of section 37 of the Income-tax Act, 1961 which corresponds to section 10(2)(xv) of the Act. An attempt was made in the Income-tax Bill of 1961 to lay down the 'necessity' of the expenditure as a condition fO't' claiming deduction under section 3 7. Section 3 7 ( 1) in the Bill read "any expenditure .... laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed .... " The introduction of the word 'necessarily' in the above section resulted in public protest.

Consequently when section 37 was finally enacted into law, the word 'necessarily' came to be dropped.

The fact that somebody other than the assessee is also benefited by the

(1) 104 I.T.R. 711.

. (2) 108 I.T.R. 280.

(3) 108 I.T.R.'846.

J .,

-. r \

SASOON J. DAVID v. C.I.T. (Venkataramiah, l.) 895

~ : .

_expenditure should not come in the way of an expenditure being

-allowed by way of deduction under section 10(2) (xv) of the Act if it

satifies otherwise the tests laid down by law.

This view is in accord with the followini observations made by this Court in The Commissioner of Income.tax, Madras v.Chandulal KesMvlal & Co. PetladC)

"Another fact that emergs from these cases is that if the B

 expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. Jn deciding whether a payment of money is a deductible expenditure orie. has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party (Usher's Wiltshire Brewery Ltd. v. Bruce) (6 T. C. 388). Another

test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby (Eastern Investments Ltd. v. The Commissioner of Income-tax, West

, Bengal) (1951) S.C.R. 594. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee."

--- --..u>· In the instant case, it was the case of the Company that many of the employees were old and superfluous and the business could be , carried on with a smaller number and the only way in which they could reduce the number was to terminate the services of all the employees by paying tem compensation and thereafter remploying some of them only. If the Company felt that that was a method which would inure to its benefit, it cannot be said that the payment of compensation was made with an oblique motive and without regard to commercial considerations or expediency. The High Court, therefore, erred on the facts and in the circumstances of the case in holding that the sum of Rs. 1,27,511/- was not deductible under section 10(2) (xv) of the Act and in answering questions Nos. ( 1) and ( 2) referred to it in Income-tax Reference No. 58 of 1963 arising out of the assessment

SUPREME COURT REPORTS [1979} 3 S.C.lt

A order for the year 1957-58 agaimt the assessee and in favour of t}le

Department to the extent of Rs. 1,27,511/-. Similarly it erred in disallowing the claim made in respe\:t of Rs. 16,885/- for each of the three succeeding assessment years.

We, therefore, allow these appeals and hold that Rs. 1,27,511/- a was also deductible under section 10(2) (xv) of the Act during the assessment year 1957-58 and sum of Rs. 16,8851referred to above was allowable as a deduction durlng each of the three succeeding assessment years. The Department shall py costs to the appellant. (Hearing fee one set only). c P.B.R.

Appeals ttUowed.

. ' /

MGIPF-330SCil/i79:.......2500-4-12-79

SASSOON J. DAVID & CO. (P) LTD., BOMBAY

May 3, 1979

N. L. UNTWALIA

E. S. VENKATARAMIAH, JJ.

Indian Income Ttx Act 1922

Section 10(2)(xv)

Davids

Taw

s. 10(2)(xv)

Indian Income Tax Act, 1922

Tatas

s. 10(2)

s. 10(2)

SASOON J. DAVID

Gordon Woodroi

s. 10(2)

s. 10(2)

V. S. Desai

Dinesh Vyas

Sree Narain

HardyaJ Hardy

Champat Rai

B. B. Tawekley

A Su

B VENKATARAMIAH

SASOON

DAVID V. C.I.T. (Venkataramiah

Sasoon J. David & Co. Pvt. Ltd.

Percival David

David

V. P. David

December 31, 1955

December 2, 1955

January 17, 1956

January 25,1956.

April 1, 1956

Tata Sons Ltd.

March 23, 1956

March 31, 1956

SUPREME COURT REPORTS [1979] 3 S.C.lt

Mathalone

A. E. Joseph

R. Mathalone

A.E. J dseph

section 10

Income-tax Act

A. E. Joseph

s 10(2)

s. 10(2)

Bombay High Court

F.E. Dinishaw Ltd.

section 66(1)

High Court of Bombay

section 66(2)

section

10

Indian Income-tax Act, 1922

section 10

Indian Income-tax Act, 1922

section 66

A. E. Joseph:-

section 10

February 5, 1970

A E. Joseph

January 25, 1956

March 23,

T - - 1956

Decmber 2,

1955

section 10(2)(xv)

SUPREME COURT REPORTS [1979] 3 S.C.ll

section 10

J. H. Phillips

March 22, 1949

April 4, 1949

March 24, 1949

J. H. Phi

section 10(2)

High Court of Madras

section 10(2)

s. 10(2)

Palkhiwala

section 10(2)

section 10(2)

section 10(2)

Scottish Drapery Corporati!Nl Ltd.

House of Fraser Ltd.

section 137

December 31. 1955

section 10(2)

High Court -of Gujarat

section 10(2)

section 10(2)

section 10(2)

section 37

Income-tax Act, 1961

section 10(2)(xv)

section 3

Section 3

section 37

section 10(2)

section 10(2)

section 10(2)


JANARDAN DATTUAPPA BONDRE, ETC. v.

GOVINDPRASAD SHIVPRASAD CHOUDHARY & ORS. ETC.

May 3, 1979

[V. R. KRISHNA !YER AND R. S. PATHAK, JJ.]

RepreS<11tation of the People Act 1951 (43 of 1951)-S. 97-Notice of r<- crimination wllen neces, sary-Every order of recount does not bring the section into play.

The appellant was declared elected to the State Assembly in the General Election in 1978. He secured 27785 votes. The fifth respondent was given 27,604 votes and the third respondent 27,447 votes.

The election of the appellant was questioned by an election petition filed in the High Court by a voter, the first respondent.

Having regard to the allegations made in respect of a number of ballot papers,

the High Court allo\ved fresh scrutiny and recount of the votes, and entrll5ted D the task to a Special Officer of the High Court. The Special Officer pointed out that in one envelope from the box of the 3rd respondent out of 278 ballot papers 28 were of the 3rd respondent while the balance of 250 \Vere the votes cast in favour of the appellant. Similarly in the envelope of the appellant out of 408 ballot papers found in this box only 158 were votes cast in his favour and

250 were in favour of the 3rd respondent and that by reason of this some mistake \.vas committed by the Returning Officer while packing the ballot papers £ in the two. envelopes of the appellant and the 3rd repondent. On the report of the Special Officer, it was contended before the High Court on behalf of the fifth respondent that it was not permissible to take into account the 250 votes cast in favour of the appellant which v./ere found in the packet of the third respondent because the order of the High Court directing a recount \'\'as limited to finding out whether any improper votes had been accepted in favour of the appellant and whether any proper vote!5 of the fifth repondent had been reject- F ed.

The High Court relying on P. Malaichami v. M. Ambalam. [1973) 3 SCR 1016 took the view that as the appellant had not filed a notice of recrimination under s. 97 of the Representation of the People Act, 1951, it was not open to him to allege that any of his votes had been improperly counted in favour of

ome other candidate.

On the basis of the report of the Special Officer the High Court held that the fifth respondent had received 191 votes more than the appellant and declared the appellan't's election to be void.

It declared the fifth respondent to be duly elected.

In the appellant's appeal to this Court it was contended that the High Court H had erred in holding that s. 97 comes into play and that no notice of recrin1ination was necessary for the purpose of having the 250 votes, whose validity was

never in dispute and \Vhich had been cast in favour of the appellant, counted in the total number of votes secured by the appellant.

HELD : 1. When the High Court directed the "physical" count of the votes cast in favour of the appellant, third respondent and others, \Vhat was intended was a n1echanical recount of these votes and nothing more.

It did not envisage any inquiry into their validity, and \Vhether any of them had been improperly received.

When the appellant requested that the 250 votes cast in his favour but included in the packet pertaining to the third respondent should be counted in his total, he was asking for nothing more than the application of a mechanical process.

These votes had never been regarded as cast in favour of the third respondent. There \Vas never any dispute that they were vote:> for the appellant.

Their validity was never doubted. Plainly what had happened was that by an error, 250 ballot papers cast in favour of the appellant had been erroneously placed in the packet of the third respondent.

[901G-902A]

2. The accident that they were not placed in his packet but in the third respondent's packet did not render them any the less votes belonging to the appellant. Their inclusion in calculating the appellant's total was a necessary part of the process involved in deciding \Vhether he had been duly elected or whether on the election petition his election should be declared void. It was a process relevant to the first of the reliefs claimed by the election petition. that is to say, the election of the appellant be declared void.

The other relief claimed by the election petitioner \Vias that the fifth respondent be declared duly elected. [902CEl

3. A notice of recrimination under s. 97 of the Act is necessary only when the returned candidate or any other candidate disputes the grant of the further declaration that he or some other candidate should be declared duly elected.

[902FJ

In the instant case \Vhen the recount was taken, the High Court had not yet concluded that the election of the appellant was invalid. It was in the process of determining that question, and the question could properly be determined only after giving to the appellant the benefit of all the votes cast for him. These would include the 250 votes cast in his favour, even though they were found placed in the third respondent's packet.

Once the benefit of his 250 votes is given to the appellant, he becomes the candidate with the highest number of votes.

His election cannot be declared void. That being so, no question arises of the 2ppe1Iant wanting to give evidence to prove that the election of any other candidate would have been void if he had been the returned candidate.

Therefore, no notice for recrimination under s, 97 was necessary. [902G-903AJ

4. The appellant was concerned with his claim to his 250 votes. The claint did not involve any reconsideration of the validity of any votes, whether cast in his favour or any other candidate. What \Vas called for v, ras a mere mechanical process of counting. Every order of recount does not bring s. 97 into play, [9030-El

Jabar Singh v. G<nda Lal [1964] 6

SCR 54, 60; Anirudh Prasad v.

Raieshwari Saroi Das & Ors., [1976] Suppl. SCR 91; referred to.

H P. Malaiclwmi v. M. Ambalam [1973] 3 SCR 1016; distinguished.

5. The High Court should not have declined to include in the appellanfs total votes the 250 votes cast in favour of the appellant but included in the packet

of the third respondent. If those votes are included in the appellant's tolal the app::-llant secures the highest number of votes and is entitled to be declared elected. [903F]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1936 of 1978.

From the Judgment and Order dated 19-8-78/3-10-78 of the Bombay High Court (Nagpur Bench) in E.P. No. 1/78.

AND

Civil Appeal No. 2387 of 1978

From the Judgment and Order dated 3-8-78122-9-7813-10-78 of C the Bonbay High Court (Nagpur Bench) in Election Petition No.

]178.

M. C. Bhandare, B. Pc Salve, A. N. Karkhanis and Mrs. S. Bhandare for the Appellant in C.A. 1936/78.

N. M. G1wtate and S. V. Deshpande for the Appellant i_n C.A. 2387178.

M. N. Phadke, Mrs. V. D. Khanna and P. G. Palsikar for R. 2 in C.A. 1936 of 1978.

U. R. Lalit and V. N. Ganpule for R. 5 in C.A. 1936/78.

T!cc Judgment of the Court was delivered by

PATHAKi J.-These two appeals under section 116A of the Representation of the People Act, 1951 are directed against an order of the High Court of Bombay declaring void the election of Janardan Dattuappa Bondre to the 104-Chikhli Legislative Assembly Constituency, F Maharashtra and declaring Bharat Rajabhau Bondre to be duly elected.

Civil Appeal No. 1936 (NCE) of 1978 has been filed by Janardan Dattuappa Bondre and Civil Appeal No. 2387 (NCE) of 1978 by Keshavrao Jaiwantrao Bahekar.

The parties will be referred to G ' hereinafter according to their array in the former appeal.

General elections to the Legislative Assembly of Maharashtra were held in February. 1978.

The appellant Janardan Dattuappa Bondre, was declared elected to the 104-Chikhli Assembly Constituency.

He secured 27,785 votes.

The fifth respondent, Bharat H Rajabhau Bondre was given 27,604 votes and the third respondent, Keshavrao Jaiwantrao Bahekar 27,447 votes.

The election of the

appellant was questioned by an election petition filed in the High Court of Bombay by a vot, r, the first respondent, Govindprasad Shivprasad Choudhary.

The High Court did not find substance in most of the ground> raised in the election petition, but having regard to the allegations made in respect of a number of ballot papers it allowed fresh scrutiny and. recount of the votes.

The task was entrusted to a Special Officer of the High Court. After considering his report and the material before it, the High Court made an order dated September 22, 1978 allowing the election petition, detlaring the election of the .. appellant'to. be void and further declaring the fifth respondent to be duly elected.

The decision was rendered on the finding that after taking into account the votes now counted in favour of the different candidates, the fifth respondent was found to have received 191 votes more than the appellant .. This result wa~ rcachcd .. aftef" denying to the appellant the benefit of 250 ballot papers cast in his favour but found included in the packet of Bahckar's ballot papers. If these 250

ballot papers are counted in favour of the appellant, it is not disputed

that the _result of the election must swing in favour of the appellant.

The submissions of learned counsel for .the parties have, therefore, centred mainly on this aspect of the case.

E The relevant portion of the report of the Special Officer reads :-

1\Vhile the counting \Vas in progress, it 'vas found that in one envelope from Box No. 2 of candidate No. 4 Shri Bahekar, there were 278 ballot papers noted by the Returning Officer on the envelope but at the time of actual counting it was found that from them 28 ballot papers were of Shri Bahekar, while the. remaining were of votes cast, in favour of candidate No. 3 Shri Janardhan Bondre.

Similarly, in the envelope of Shri J anardhan Bondre there were 408 ballot papers noted by the Returning Officer but :it the time of actual counting of that envelope it was noticed that from out of 40"8 ballot papers, 158 only were of Shri" Janardhan Bondre and the remaining were of Shri Bahekar.

It would be therefore clear that there was some mistake committed by the Returning Officer while packing the ballot papers in the two envelopes of Shri Bahekar and Janardhan Bondre."

On the report of the Special Officer, it was contended before the High Court on behalf of the fifth respondent that it was not pennis- •

sible to take into account the 250 votes cast in favour of the appellant and found in the packet of Bahekar because the order of the

HiQh Court directincr a recount was limited to finding out whether any b improper votes had been accepted in favour of the appellant and whether any proper votes of the fifth respondent had been rejected.

Relying on P. Malaichami v. M. Ambalam,('), the High Court took the view that as the appellant had not filed a notice of recrimination under s. 97 of the Representation of the People Act, 1951, it was not open to him to allege that any of his votes had been improperly counted in favour of some other candidate.

In the appeal filed by Janardan Dattuappa Bondre, the principal contention on behalf of the appellant is that the High Court has erred in holding that Section 97 comes into play. It is vehemently contended that no notice ofl recrimination was necessary for the purpose of having the 250 votes, whose validity was never in dispute and which had been cast in favour of the appellant, counted in the total number of votes secured by the appellant.

It seems to us that the appellant is right.

The order for a recount was made by the High Court on an application made by the election petitioner.

The directions in the order required the Special Officer, among other things, to physically count the votes recorded in favour of the appellant, Bahekar and other candidates in order to ascertain whether those votes were less than the number of votes declared as having been respectively secured by them.

During the recount, the appellant applied to the Special Officer that if any votes cast in his favour were found to have been erroneously counted in the total of ot_her candidates the mistake should be rectified by including them in his total.

A similar application was made by Bahekar.

The High Court rejected the appellant's application on the ground that h_e had not filed a notice of recrimination.

It seems to us that when the High Court directed the "physical" count of the votes cast in favour of the appellant, Bahekar and others what was intended was a mechanical recount of those votes and nothing more.

It did not envisage any enquiry into their validity, and whether any of them had been improperly received.

When the appellant requested that the 250 votes cast in his favour but included in the packet pertaining to Bahekar should be counted in his total, he was asking for nothing more than the application of a mechanical process.

Those votes had never been regarded as cast in favour of Bahekar.

There was never any dispute that they were votes for the appellant.

Their validity was never doubted.

Plainly

(1) [197313 S.C. R. 1016

what had happened wµs that by an error 250 ballot papers cast in favour of the appellant had been erroneously placed in the packet of Bahekar.

It is quite probable that as equal numbers of ballot papers of the two candidates were exchanged, the error occurred after the ballot papers of each candidate had been separately tied in bundles of 50, as is required by the "Handbook for Returning Officers".

After withdrawing the 250 votes of Bahekar from the appellant's packet and the appellant's 250 votes from Bahekar's packt, the Special Officer could not stop there.

The 250 votes of each candidate had then to be counted in his total.

They were not valid votes.

The inclusion of the 250 votes cast in favour of the appellant was material for the purpose of determining the total number of votes received by him.

The accident that they were not placed it1 his packet but in Bahekar's packet did not render them any the less votes belonging to the appellant.

Their inclusion in calculating the appellant's total was a necessary part of the process involved in deciding whether he had been duly elected or whether on the election petition, his election should be declared void. It was a process relevant to the first of the reliefs claimed by the election petitioner, that is to say, that the election of the appellant be declared void.

The other relief claimed by the election petitioner was that the fifth respondent be declared duly elected.

Now, as was observed in Jabar Singh v.

Genda Lal,(') where both reliefs are claimed in an election petition the Court must first "decide the question whether the ekction of the returned candidate is valid or not, and if it is found that the said election is void, it makes a declaration to that effect and then deals with the further question whether the petitioner himself or some other person can be said to have been duly elected".

A notice of recrimination under section 97 of the Act is necessary only where the returned candidate or other candidate disputes the grant of the further declaration sought by the election petitioner that he or some other candidate should be declared duly elected.

When the recount wllS taken, the High Court had not yet concluded that the election of the appellant was invalid. It was in the process of determining that question, and the question could properly be determined only after giving to the appellant the benefit of all the votes cast for him. These would include the 250 votes cast in his favour, even though they were found placed in Bahekar's packet.

Once the benefit of his 250 votes is i:iven to the appellant, he becomes the candidate with the highest number of votes.

His election cannot be declared void.

(1) [1964] 6 S.C.R. 54, GO.

--'¥

~ • ..

- .

That being so, no question arises of the appellant wanting to give evidence to prove that the election of any other canddiate would have been void if he had been the returned candidate.

Therefore, no notice for recrimination under section 97 was necessary. In the circumstances, the High Court erred in declining to count the appellant's 250 votes in his total on the ground that no' notice of recrimination under section 97 of the Act had been given.

In P. Malaichami v. M. Ambalam (supra), on which the High Court relied, the facts were different. In that case, the recount ordered did not inolvc the mere mechanical process of counting the valid votes cast in favour of the parties. It involved the kind ot counting contemplated under Rule 56 of the Conduct of Election Rules, 1961, "with all its implications".

The validity of the votes was to be under re-examination.

And if the returned candidate intended to take the benefit of such a recount against the election petitioner or other candidate, in whose favour the further declaration of being duly elected had been claimed, it was necessary for him to file a notice of recrimination.

In fhe present case, the appellant was concerned with his claim to his 250 votes.

The claim did not involve any reconsideration of the validity of any votes, whether cast in his favour or any other candidate; what was called for was

a mere mechanical process of counting.

That every order of recount does not bring section 97 into play was laid down by this E Court in Anirudh Prasad v. Rajeshwari Saroj Das & Ors.(')

We are of opinion that the High Court should not have declined to include in the appellant's total votes the 250 votes cast in favour of the appellant but included in the packet of Bahekar. If those votes are included in the appellant's total, the appellant secures the highest F number of votes and is entitled to be declared elected.

Jn the circumstances, it is not necessary to consider the other contention of learned counsel for the appellant that the High Court was in error in directing a recount of the ballot papers .

A submission was made by learned counsel for the fifth respondent that the postal ballot papers were printed in Hindi and therefore, Rule 22 of the Conduct of Election Rules, 1961 was contravened.

The point was raised before the High Court and, has, in our opinion, been rightly repelled.

On the material before us it is not possible to s;.y that the result of the election has been materially effected by that irregularity.

;, (I) [1976] Suppl. S. C. R. 91.

A In the appeal filed by Bahekar, the contention raised for him is

that on a proper and complete reconnt of the votes cast for the respective candidates it is he who should be declared duly elected. We are not satisfied that the grounds raised have any substance, and we see no force in his appeal.

In the result, Civil Appeal No. 1936 (NCE) of 1978 is allowed and Civil Appeal No. 2387 (NCE) of 1978 is dismiS>ed. The order of the High Court declaring the election of the appellant void and declaring the fifth respondent duly elected is set aside.

The election petition is dismissed.

The appellant is entitled to his costs throughout against the second and the fifth respondents in the election petition as well as in the appeal filed by him.

The remaining respondents will bear their own costs in that appeal.

All the parties will bear their own costs in the other appeal.

N.V.K.

C.A. 1936/78 allowed.

C.A. 2387 /78 dismissed.

r •

JANARDAN DATTUAPPA BONDRE, ETC

R. S. PATHAK, JJ.

People Act 1951

S. 97

[1973) 3 SCR 1016

s. 97

Representation of the People Act, 1951

s. 97

\Vias

s. 97

s. 97

[1964] 6

SCR 54

[1973] 3 SCR 1016

M. C. Bhandare

A. N. Karkhanis

S. Bhandare

N. M. G1wtate

S. V. Deshpande

M. N. Phadke

V. D. Khanna

P. G. Palsikar

U. R. Lalit

V. N. Ganpule

PATHAKi

section 116A

Representation of the People Act, 1951

Janardan Dattuappa Bondre

Bharat Rajabhau Bondre

Keshavrao Jaiwantrao Bahekar

Janardan Dattuappa Bondre

Bharat H Rajabhau Bondre

Keshavrao Jaiwantrao Bahekar

High Court of Bombay

Govindprasad Shivprasad Choudhary

September 22, 1978

Bahckar

Bahekar

Janardhan Bondre

J anardhan Bondre

Janardhan Bondre

s. 97

Representation of the People Act, 1951

Section 97

Bahekar

Bahekar

s 250

section 97

[1964] 6 S.C.R. 54

section 97

s 250

section 97

Conduct of Election Rules, 1961

section 97

Conduct of Election Rules, 1961