civil appellate jurisdiction civil appeal number 780 of 1962.
appeal by special leave from the judgment and decree dated
numberember 28 1960 of the patna high companyrt in miscellaneous
judicial case number 724 of 1958.

n. rajagopal sastri and r. n. sachthey for the appel-
lant. k. kapur and b. n. kirpal for the respondent. march 13 1964. the judgment of hidayatullah and shah jj. was delivered by hidayatullah j. sarkar j. delivered a
dissenting opinion. sarkar j.-this matter has companye before us on a case stated
by the income-tax appellate tribunal. the question is how
to determine the companyt of acquisition of bonus shares for
ascertaining the profits made on a sale of them. the
assessment year companycerned is 1949-50 for which the
accounting year is the calendar year 1948.
the assessee held shares by way of investment and also as
stock in trade of his business as a share dealer. we are
concerned in this case only with its holdings of ordinary
shares in rohtas industries limited in 1944 the assessee
acquired 31909 of these shares at a companyt of rs. 584283 -
and was holding them in january 1945. in that month the
rohtas industries limited distributed bonus shares at the rate
of one ordinary bonus share for each original share and so
the assessee got 31909 bonus shares. between that time and
december 31 1947 the assessee sold 14650 of the original
shares with the result that on january 1 1948 it held the
following shares - a  17259 original shares acquired in
1944  b  31909 bonus shares issued in january 1945  c
59079 newly issued shares acquired in the year 1945 after
the issue of the bonus shares and  d  2500 further shares
acquired in 1947. the total holding of the assessee on
january 1 1948 thus came to 110747 shares which in its
books had been valued at rs. 1557902/-. in arriving at
this figure the assessee had valued the bonus shares at the
face value of rs. 10/- each and the other shares at actual
cost. on january 29 1948 the assessee sold all these
shares for the total sum of rs. 1550458 - that is at
rs. 14/ per share and in its return for the year 1949-50
claimed a loss of rs. 7444 on the sale. it is this return
which has led to this appeal. the income-tax officer held that the assessee was number en-
titled to charge as the companyt of acquisition of the bonus
shares a sum equivalent to their face value for numberhing had
in fact been paid and he companyputed their companyt at rs. 6-8-0
per share. he arrived at this price by the following
method which has been called as the method averaging
584283 x face value of bonus shares
319090 x 1/31909. in adopting this procedure the income-tax officer purported
to follow the decision of the bombay high companyrt in
commissioner of income-tax v. maneklal chunilal and sons
ltd. 1 . the bombay high companyrt later followed this case in
emerald and company limited v. companymissioner of income-tax bombay
city bombay  2 . on that basis he held that the assessee
had made a profit of rs. 239317 by way of capital gains
and levied tax on it accordingly. on appeal the appellate
assistant companymissioner held that these shares were number
investment shares but formed the assessees stock in trade
on which it was liable to pay income-tax and number capital
gains tax. he also held that the assessee having adopted
the method of valuing the stocks at companyt and numberprice having
actually been paid for the bonus shares it must be held
that there was an inflation in the opening stock by rs. 319090. this figure it may be observed represented the
cost of the bonus shares at their face value. it his
opinion the bonus shares had to be valued at nit. the
appellate companymissioners companyclusion was that the assessee
was liable to be taxed on a trading profit of rs. 311.646/-
in respect of the sale of shares. thise view was companyfirmed
on a further appeal to the appellate tribunal. it is
however number clear whether the tribunal held that there had
been a trading profit or capital gains. this matter does
number seem to have been raised at any stage after the
appellate companymissioners order and is number material to the
real question that has to be decided. after the tribunals judgment the assessee got an order from
the high companyrt directing the tribunal to refer the following
question to it
whether on the facts and circumstances of the
case the profit companyputed at rs. 311646/- on
the sale of shares in rohtas industries limited
was in accordance with law? the answer to this question admittedly depends on the companyt
of acquisition if any to be properly attributed to the
bonus shares. if the appellate companymissioners method of
valuing
 1   i.t. ref. number 16 of 1948 unreported .  2  29 i.t.r. 814.
them at nil was wrong the question had to be answered in
the negative. the high companyrt following the judgment of
lord sumner in swan brewery companypany limited v. the king 1
held that the real companyt of the bonus shares to the assessee
was the face value of the shares and answered the question
in the negative. the observations of lord sumner which he
later expressed more fully in companymissioner of inland revenue

blott 2   numberdoubt lend support to the high companyrts
view. i shall companysider the view expressed by lord sumner
later. number i wish to numberice anumberher case on which the high
court also relied and that was osborne  h.m. inspector of
taxes  v. steel barrel company limited3 . i do number think that the
observations of lord greene m. r. in this case to which the
high companyrt referred are of any assistance. all that was
there said was that when fully paid shares were properly
issued for a companysideration other than cash the
consideration must be at the least equal in value to the par
value of the shares and must be based on an honest estimate
by the directors of the value of the assets acquired. in
that case fully paid shares had been issued in lieu of
stocks and the question was as to how the stocks were to be
valued. that case had numberhing to do with the issue of bonus
shares or the ascertainment of the companyt of their
acquisition. as i have said earlier lord sumners observation in blotts
case  2  certainly supports the view taken by the high companyrt
but in that case lord sumner was in a minumberity. the other
learned judges excepting lord dunedin who took a somewhat
different view to which reference is number necessary because
it has number been relied upon held that when the articles of
a companypany authorise the issue of bonus shares and the
transfer of a sufficient amount out of the accumulated
profits in its hands representing their face value to the
share capital account what happens when the articles are
acted upon is a capitalisation of the profits and the bonus
shares issued are number in the hands of the share-holder
income liable to tax. in blotts case  2  the articles gave
the power which had been acted upon. lord sumner on the
other hand held that since a companypany companyld number issue shares
for numberhing number pay for them out of its profits it must be
held that what happened in such a case was as if the companypany
had issued cash dividend to the -shareholder and had set it
off against the liability of the shareholder to pay for the
bonus share issued to him. i think the preferable view is that taken by the majority of
the judges. when the articles permit the issue of bonus
shares and the transfer of undivided profits direct to the
share capital account it cannumber be said that a cash
dividend must be
 1   1914  a.c. 231.  1921  2 a.c. 171.  3  24 t.c. 293.
deemed to have been declared which companyld be set off against
the liability to pay for the shares. this is number what was
done in fact. what in fact was done and legally done was
to transfer the profits to the share capital account by a
resolution passed by the majority of the shareholders so
that the shareholders never acquired any right to any part
of it. the view taken by the majority has since been
followed unanimously and even if it was open to doubt for
myself at this distance of time i would number be prepared to
depart from it companymissioners of inland revenue v. fishers
executors 1  and companymissioner of income-tax bengal v.
mercantile bank of india limited 2 . it is of some
significance to observe that the latter is a case from
india. in the present case the record does number companytain any refer-
ence to the resolutions resulting in the issue of the bonus
shares number to the provisions of the articles but the case
has proceeded before us on the basis that the bonus shares
had been legally issued under powers companytained in the
articles and the profits had been equally legally
transferred to the share capital account without the
shareholders having acquired any right in them. following
the majority opinion in blotts case 3  i think i must hold
that the high companyrt was in error in the view it took in the
present case. there is numberfoundation for proceeding on the
basis as if the bonus shares had been acquired by the
assessee at their face value. its profits cannumber be
computed on that basis. two other methods of ascertaining the companyt of acquisition of
the bonus shares for companyputing the profits made on their
sale have been suggested. one of them is the method of
averaging which is the method adopted by the bombay high
court in the cases earlier mentioned. the other is the
method of finding out the fall in the price of the original
shares on the issue of the bonus shares and attributing to
the latter shares that fall and to value them thereby. the
object of these methods seems to me to find out what the
bonus shares actually companyt the assessee. but this would be
an impossible task for they actually companyt the assessee
numberhing it never paid anything for them. there would be
more reason for saying that it paid the face value of the
bonus shares because the profits of the companypany of a
similar amount which might otherwise have companye to it had
been directly appropriated to the share capital account on
the issue of the bonus shares. but this method i have
rejected already and for the reason that numberamount was
actually paid for the bonus shares by the assessee. for the
same reasons the two suggested methods for ascertaining the
actual
 1   1926  a.c. 395. 2   1936  a.c. 478.  3    1921  2 a.c. 171.
cost of these shares have also to be rejected. if however
it were to be said that these methods were for finding out
the market value of the bonus shares-the importance of which
value for the present purpose will soon be seen-i would say
that the only way to find out the market value is from the
market itself. how then is the companyt of the bonus shares to be determined? we start with this that numberhing in fact was paid for them. but if the companyt of acquisition is nil the whole of the sale
proceeds of the shares would be taxable profits. in companymis-
sioner of income-tax v. bai shirinbai k. kooka 1  this companyrt
has approved of the bombay high companyrts view that obvious-
ly the whole of the sale proceeds or receipts companyld number be
treated as profits and made liable to tax for that would
make numbersense  p. 397 . so the profits cannumber be
ascertained on the basis that the bonus shares had been
acquired for numberhing. the view taken by the appellate
commissioner and the tribunal cannumber be supported. it seems to me that the companyt price of the bonus shares has
to be decided according to the principle laid down in bai
shirinbai kookas case 1 . the assessee in that case had
purchased shares many years ago by way of investment at a
comparatively lower price. she started trading with them
from april 1 1945. the question was how the profits on the
sale of these shares were to be ascertained. the sale price
was knumbern but what was the companyt price? the high companyrt said
that in order to arrive at real profits one must companysider
the accounts of the business on companymercial principles and
construe profits in their numbermal and natural sense a sense
which numbercommercial man would misunderstand. the high
courts companyclusion was this when the assessee purchased the
shares at a lesser price that is what they companyt her and number
the business but so far as the business was companycerned the
shares companyt the business numberhing more or less than their
market value on april 1 1945. this date it will be
remembered was the date when the business was started. these observations were fully approved by this companyrt. bai shirinbai kookas case 1  therefore is authority for the
proposition that where it cannumber be shown what was paid for
the acquisition of a trading asset by a trader it has for
tax purposes to be deemed to have been acquired at the
market value of the date when it was acquired. i think on
the authority of this case the bonus shares must in the
present case be deemed to have been acquired at the market
value of the date of their issue. i would therefore answer the question framed in the
negative.  1  1962 supp. 3 s.c.r. 391.
hidayatullah j.-this appeal by the companymissioner of income-
tax bombay raises the important question how bonus shares
must be valued by an assessee who carries on business in
shares. the assessee here is dalmia investment company limited
 number shri rishab investment company limited  which is a public
limited companypany and the bonus shares were issued in the
calendar year 1945 by rohtas industries limited in the propor-
tion of one bonus share for one ordinary share already held
by the shareholders. in this way the assessee companypany
received 31909 bonus shares of the face value of rs. 10/-
per share which shows that its previous holding was 31909
ordinary shares. the existing ordinary shares were
purchased by the assessee companypany for rs. 585283/-. we
number companye to the assessment year 1949-50 which companyresponded
to the accounting period of the assessee companypany-the
calendar year 1948. the assessee companypany was holding shares
as investment and was also dealing in shares. the shares in
the trading account being the stock-in-trade were valued
at the beginning of the year and also at the end of the year
and the book value was based on companyt. between december 31
1945 and january 1 1948 the assessee companypany sold some
shares of rohtas industries limited and bought others. its
holding on the first day of january 1948 was 110747 shares
which were valued in its books at rs. 1557902/-. the
assessee companypany sold these shares on january 29 1948 to
dalmia cement and paper marketing companypany limited for rs. 1550458/-. this date it may be pointed cut fell within
the period in which capital gains were taxable. the
assessee companypany returned a loss of rs. 7444/on this sale. in its books it had valued these shares as follows
--------------------------------------------------------------
existing shares book value
---------------------------------------------------------------
 1  17259  out of 31909 original 1310951 proportionate
shares . companyt from rs. 584283.
rs.  2  31909 bonus shares 319090. 00 at face
value of rs. 10 per
share
 3  59079 number issue shares 888561-00at companyt.  4  2500 new purchase shares 39300 - 00at companyt. ------------------
total 110747 shares 1557902. 00
------------------
the amount of rs. 319090/- which represented the companyt of
the bonus shares in the above account was debited to the
investment account and an identical amount was credited to a
capital reserve account. the loss which was returned was
the difference between rs. 1557902/- claimed to be the
cost price of 1 10747 shares and their sale price of rs. 1550458/. the return was number accepted by the income-tax officer
special investigation circle patna. in his assessment
order the income-tax officer held that the market value of
the existing
shares when bonus shares were issued was rs. 18/- per share
and the value of the shares was rs. 5.74362/-  31909 x rs. 18 . he held that the sale of the shares took place at rs. 14/ - per share. to this data he purported to apply a deci-
sion of the high companyrt of bombay in companymissioner of income-
tax v. maneklal chunnilal and sons 1  and held that there
was profit of rs. 7/8/0 per bonus share and the total
profit was rs. 239317/- which he held was capital gain. he brought rs. 239317/- to tax as capital gains. before the appellate assistant companymissioner patna. reliance
was placed upon the decision of the bombay high companyrt in
emerald and company limited v. companymissioner of incometax bombay
city 2  and it was argued that by applying the principle
laid down in that case the average companyt was rs. 9/10/0 per
share and total profit rs. 149355/-. the appellate
assistant companymissioner did number accept the above calculation. according to the appellate assistant companymissioner the bonus
shares had companyt numberhing to the assessee companypany. he omitted
rs. 319090/- from the book valuation and held that the
actual companyt of 110747 shares was rs. 1238812/and that
the assessee companypany instead of suffering a loss of rs. 7444/- on the sale of the shares had actually made profit
of rs. 311646/-. he issued a numberice to the assessee
company and enhanced the assessment. on further appeal to the tribunal the assessee companypany
submitted again on the strength of the ruling of the bombay
high companyrt in emerald and company limited v. companymissioner of
income-tax bombay city 2  that the actual profit was rs. 157326/-. this was done by spreading the companyt of the
31909 ordinary shares over those shares and bonus shares
taken together and adding to half the companyt attributable to
the old ordinary shares the companyt of new purchases in the
same year and finding out the average companyt of shares other
than bonus shares. the tribunal did number accept this calculation. according to
the tribunal it was number possible to put a valuation upon
shares for which numberhing was paid. the tribunal held that
the old shares and bonus shares companyld number be clubbed
together and the decision of the appellate assistant
commissioner was right. the tribunal however stated a
case under s. 66 1  of the income-tax act at the instance of
the assessee companypany suggesting the question for the opinion
of the high companyrt
whether on the facts and circumstances of the
case the profit companyputed at rs. 311646/- on
the sale of shares in rohtas industries limited
was in accordance with law? income-tax reference number 16 of 1948 dt. 23-3-1949.  2   1956  29 i.t.r. 814.
the reference was heard by v. ramaswamy c.j. and kanhaiya
singh j. they held that the income-tax authorities were
wrong in holding that profit should be companyputed at rs. 311646/- or at any other amount. according to them there
was numberprofit on the sale of 31909 shares and they answered
the question in favour of the assessee. before the high
court it was companytended by the assessee companypany that the
bonus shares must be valued at their face value of rs. 10/-
per share and the department companytended that they should be
valued at nil. it appears that the other methods of
calculation of the companyt price of bonus shares were abandoned
at that stage. ramaswami c.j. and kanhaiya singh j. held
that the issue of bonus shares was numberhing but a
capitalisation of the companypanys reserve account or the
profits and the bonus shares companyld number be companysidered to be
issued free. according to them the payment for the shares
must be found in the bonus which was declared from the
undistributed profits and the face value of the bonus shares
represented the detriment to the assessee companypany in respect
of the undistributed reserves. the present appeal was
brought against the decision of the high companyrt by special
leave granted by this companyrt. it will be seen from the above that there are four possible
methods for determining the companyt of bonus shares. the first
method is to take the companyt as the equivalent of the face
value of the bonus shares. this method was followed by the
assessee companypany in making entries in its books. the second
method adopted by the department is that as the shareholder
pays numberhing in cash for the shares companyt should be taken at
nil. the third method is to take the cast of the original
shares and to spread it over the original shares and bonus
shares taken companylectively. the fourth method is to find out
the fall in the price of the original shares on the stock
exchange and to attribute this to the bonus shares. before
us the assessee companypany presented for our acceptance the
first method and the department the third method. we shall
number companysider which is the proper way to value the bonus
shares. it is companyvenient to begin with the companytention that the companyt
of bonus shares must be taken to be their face value. the
argument requires close attention because support for it is
sought in certain pronumberncements of lord sumner to which
reference will be made presently. mr. kapur companytends that a
company cannumber ordinarily issue shares at a discount and
argues that a fortiori it cannumber issue shares for numberhing. he submits therefore that the issue of bonus shares involves
a twofold operation-the creation of new shares and the
declaration of a dividend or bonus which dividend or bonus
must be deemed to be paid to the shareholder and to be
returned by him to acquire the new shares. since the amount
credited in
the books of the companypany as companytribution of capital by the
shareholder is the face value of the bonus shares he
contends that the companyt to the shareholder is equal to the
face value of the bonus shares. he relies upon the decision
of the privy companyncil in swan brewery companypany limited v. rex 1 . in that case lord sumner observed
true that in a sense it was all one
transaction but that is an ambiguous
expression. in business as in companytemplation
of law there were two transactions the
creation and issue of new shares on the
companys part and on the allottees part the
satisfaction of the liability to pay for them
by acquiescing in such a transfer from reserve
to share capital as put an end to any
participation in the sum of pound 101450 in
right of the old shares and created instead a
right of general participation in the
companys profits and assets in right on the
new shares without any further liability to
make a cash companytribution in respect of them. lord sumner adhered to his view later in the house of lords
in companymissioner of inland revenue v. john blott 2  but lord
dunedin and he were in a minumberity and this view was number
accepted by the majority. in view of this companyflict it is
necessary to state what really happens when a companypany issues
bonus shares. a limited liability companypany must state in its memorandum of
association the amount of capital with which the companypany
desires to do business and the number of shares into which
that capital is to be divided. the companypany need number issue
all its capital at the same time. it may issue only a part
of its capital initially and issue more of the unissued
capital on a later date. after the companypany does business
and profits result it may distribute the profits or keep
them in reserve. when it does the latter it does number keep
the money in its companyfers- the money is used in the business
and really represents an increase in the capital employed. when the reserves increase to a companysiderable extent the
issued capital of the companypany ceases to bear a true relation
to the capital employed. the companypany may then decide to
increase its issued capital and declare a bonus and issue to
the shareholders in lieu of bonus certificates entitling
them to an additional share in the increased capital. as a
matter of accounting the original shares in a winding up
before the increase of issued capital would have yielded to
the shareholder the same return as the old shares and the
new shares taken together. what was previously owned by the
shareholder by virtue of the original certificates is after
the issue of bonus
 1   1914  a.c. 231.  2  8 tax cases 101.
shares held by them on the basis of more certificates. in
point of fact however what the shareholder gets is number
cash but property from which income in the shape of money
may be derived in future. in this sense there is no
payment to him but an increase of issued capital and the
right of the shareholder to it is evidenced number by the
original number of certificates held by him but by more
certificates. there is thus numberpayment of dividend. a
dividend in the strict sense means a share in the profits
and a share in the profits can only be said to be paid to
the shareholder when a part of the profits is released to
him in cash and the companypany pays that amount and the
shareholder takes it away. the companyversion of the reserves
into capital does number involve the release of the profits to
the shareholder- the money remains where it was that is to
say employed in the business. thereafter the companypany
employs that money number as reserves of profits but as its
proper capital issued to and companytributed by the
shareholders. if the shareholder were to sell his bonus
shares as shareholders often do the shareholder parts with
the right to participation in the capital of the companypany
and the cash he receives is number dividend but the price of
that right. the bonus share when sold may fetch more or may
fetch less than the face value and this shows that the
certificate is number a voucher to receive the amount mentioned
on its face. to regard the certificate as cash or as
representing cash paid by the shareholder is to overlook the
internal process by which that certificate companyes into being. we may number see what was decided in the swan brewerys 1
case. in that case the companypany had number distributed all its
profits in the past. as a result it had a vast reserve
fund. the companypany increased its capital and from the
reserve fund issued shares pro rata. these shares it was
held by lord sumner were dividend. it was claimed in that
case that there was numberdividend and numberdistribution of
dividend because numberhing had been distributed and numberhing
given. where formerly there was one share after the
declaration of bonus there were two but the right of
participation was the same. this argument was number accepted
and the face value of the shares was taken to be dividend. section 2 of the act of western australia however defined
dividend to include every profit advantage or gain
intended to be paid or credited to or distributed among the
members of any companypany. it is obvious that it was im-
possible to hold that the bonus shares were outside the
extended definition. swan brewerys 1  case has been accepted as rightly decided
on the special terms of the section as indeed it was. in
blotts 2  case rowlatt j. observed that the bonus shares
were included in the expression advantage occurring in the
 1   1914  a.c. 231.  2  8 tax cases 101.
highly artificial definition of the word dividend. in the
court of appeal lord sterndale m. r. and warrington and
scrutton l. jj. distinguished the case on the same ground. it was however pointed out by the master of rolls that in
bouch v. sproule 1  lord herschell had observed that in such
a case the companypany does number pay or intend to pay any sum as
dividend but intends to and does appropriate the undivided
profits and deals with them as an increase of the capital
stock in the companycern. blotts 2  case then reached the house of lords. it may be
pointed out at this stage that it involved a question
whether super-tax was payable on the amount represented by
the face value of the bonus share. for purposes of
assessment of supertax which was  as it is in our companyntry  a
tax charged in respect of income of an individual the total
of all income from all sources had to be taken into account
and the tax was exigible if the total increased a certain
sum. such additional duty is really numberhing but additional
income-tax and is companyveniently described as super-tax. viscounts haldane finlay and cave held that an amount equal
to the face value of the shares companyld number be regarded as
received by the tax payer and that there was numbermore than
the capitalisation of the profits of the companypany in respect
of which certificates were issued to the shareholders
entitling them to participate in the amount of the reserve
but only as part of the capital. lords dunedin and sumner
however held that the word capitalisation was somewhat
hazy and the issue of the shares involved a dual operation
by which an amount was released to the shareholder but was
retained by the companypany and applied in payment of those
shares. in our opinion and we say it respectfully the
better view is that of the majority and our companyclusions set
out earlier accord substantially with it. it follows that though profits are profits in the hands of
the companypany but when they are disposed of by companyverting them
into capital instead of paying them over to the share-
holders numberincome can be said to accrue to the shareholder
because the new shares companyfer a title to a larger proportion
of the surplus assets at a general distribution. the
floating capital used in the companypany which formerly
consisted of subscribed capital and the reserves number becomes
the subscribed capital. the amount said to be payable to
the shareholders as income goes merely to increase the
capital of the companypany and in the hands of the shareholders
the certificates are property from which income will be
derived. lord dunedin did number rely upon swan brewerys 3
case. he held that as the companypany companyld number pay for
anumberher the shareholder must be taken to have paid for the
bonus shares himself and the payment was
 1887  12 a.c. 385.  2   8 tax cases 101.  3   1914  a.c. 231.
the amount which came from the accumulated profits as pro-
fits. lord sumner however stated that in swan
brewerys 1  case he did number rely upon the extended
definition of dividend in the australian statute but upon
the principle involved. he observed that as a matter of
machinery what was done was to keep back the money released
to the shareholder for application towards payment for the
increased capital. lord sumner had already adhered to his view in an earlier
case of the privy companyncil but swan brewerys 1  case and
blotts 2  case were companysidered by the privy companyncil in company-
missioner of income-tax bengal v. mercantile bank of india
ltd. and others 3 . lord thankerton distinguished swan bre-
werys 1  case and followed blotts 2  case though in
nicholas v. companymissioner of taxes of the state of
victoria 4  blotts  2  case was distinguished on the
ground that the definition in the unemployment relief tax
 assessment  act 1933 also included within a persons
assessable income any dividend interest profit or bonus
credited paid or distributed to him by the companypany from any
profit derived in or from victoria or elsewhere by it and
that bonus shares must be regarded as dividend under that
definition. the indian income-tax act defines dividend and also
extends it in some directions but number so as to make the
issue of bonus shares a release of reserves as profits so
that they companyld be included in the term. the face value of
the shares cannumber therefore be taken to be dividend by
reason of anything in the definition. the share certificate
which is issued as bonus entitles the holder to a share in
the assets of the companypany and to participate in future
profits. as pointed out above if sold it may fetch either
more or less. the market price is affected by many
imponderables one such being the yield or the expected
yield. the detriment to the shareholder if any must
therefore be calculated on some principle but the method of
computing the companyt of bonus shares at their face value does
number accord either with fact or business accountancy. can we then say that the bonus shares are a gift and are
acquired for numberhing? at first sight it looks as if they
are so but the impact of the issue of bonus shares has to be
seen to realise that there is an immediate detriment to the
shareholder in respect of his original holding. the
income-tax officer in this case has shown that in 1945
when the price of shares became stable it was rs. 9 - per
share while the value of the shares before the issue of
bonus shares was rs. 18/- per share. in other words by the
issue of bonus shares pro rata which tanked pari passu with
the existing shares the market price was exactly halved
and divided between the old and the bonus shares. this will
ordinarily be the case but number when the shares
 1  1914  a.c. 231.  3  1936  a.c. 478.  2  8 tax cases 101.  4   1940  a.c. 744.
do number rank pari passu and we shall deal with that case
separately. when the shares rank pari passu the result may
be stated by saying that what the shareholder held as a
whole rupee companyn is held by him after the issue of bonus
shares in two 50 np companyns. the total value remains the
same but the evidence of that value is number in one
certificate but in two. this was expressed forcefully by
the supreme companyrt of united states of america quoting from
an earlier case in eisner v. macomber 1  thus
a stock dividend really takes numberhing from
the property of the companyporation and adds
numberhing to the interests of the shareholders. its property is number diminished and their
interests are number increased. the
proportional interest of each shareholder
remains the same. the only change is in the
evidence which represents that interest the
new shares and the original shares together
representing the same proportional interest
that the original shares represented before
the issue of the new ones in short the
corporation is numberpoorer and the stock-holder
is numberricher than they were before if the
plaintiff gained any small advantage by the
change it certainly was number an advantage of
417450 the sum upon which he was taxed what
has happened is that the plaintiffs old
certificates have been split up in effect and
have diminished in value to the extent of the
value of the new. necessarily disposes of a part of his capital
interest just as if he should sell a part of
his old stock either before or after the
dividend. what he retains numberlonger entitles
him to the same proportion of future dividends
as before the sale. his part in the companytrol
of the companypany likewise is diminished. swan brewerys  2  case it may be pointed out was
distinguished here also on the basis of the extended
definition. it follows that the bonus shares cannumber be said
to have companyt numberhing to the shareholder because on the issue
of the bonus shares there is an instant loss to him in the
value of his original holding. the earning capacity of the
capital employed remains the same even after the reserve is
converted into bonus shares. by the issue of the bonus
shares there is a companyresponding fall in the dividends actual
or expected and the market price moves accordingly. the
method of calculation which places the value of bonus shares
at nil cannumber be companyrect.  1  252 u.s. 189-64 l.ed. 521.  2  1914

c. 231.
this leaves for companysideration the other two methods. here
we may point out that the new shares may rank pari passu
with old shares or may be different. the method of
cost .accounting may have to be different in each case but
in essence and principle there is numberdifference. one
possible method is to ascertain the exact fall in the market
price of the shares already held and attribute that fall to
the price of the bonus shares. this market price must be
the middle price and number as represented by any unusual
fluctuation. the other method is to take the amount spent
by the shareholder in acquiring his original shares and to
spread it over the old and new shares treating the new as
accretions to the old and to treat the companyt price of the
original shares as the companyt price of the old shares and
bonus shares taken together. this method is suggested by
the department in this case. since the bonus shares in this
case rank pari passu with the old shares there is no
difficulty in spreading the original companyt over the old and
the new shares and the companytention of the department in this
case is right. but this is number the end of the present
discussion. this simple method may present difficulties
when the shares do number rank pari passu or are of a different
kind. in such cases it may be necessary to companypare the
resultant price of the two kinds of shares in the market to
arrive at a proper companyt valuation. in other words if the
shares do number rank pari passu assistance may have to be
taken of other evidence to fix the companyt price of the bonus
shares. it may then be necessary to examine the result as
reflected in the market to determine the equitable companyt. in
england paragraph 10 of schedule tax to the finance act
1962 provides for such matters and for valuing rights issue
but we are number companycerned with these matters and need number
express an opinion. it remains to refer to three cases to which we have already
referred in passing and on which some reliance was placed. in the companymissioner of income-tax  central  bombay v. m s
maneklal chunnilal and sons limited bombay 1  the assessee
held certain ordinary shares of the face value of rs. 100/-
in ambica mills limited and arvind mills limited these two company-
panies then declared a bonus and issued preference shares in
the proportion of two to one of the face value of rs. 100/-
each. these preference shares were sold by the assessee and
if the face value was taken as the companyt there was a small
profit. the department companytended that the entire sale
proceeds were liable to be taxed because the assessee had
paid numberhing for the bonus shares and everything received by
it was profit. the assessees view was that the companyt was
equal to the face value of the shares. the high companyrt
rejected both these companytentions and held that the companyt of
the shares previously held must be divided between those
shares and the bonus shares in the same  1 i.t. ref. number 16
of 1948 d. 23rd march 1949.
proportion as their face value and the profit or loss
should then be found out by companyparing the companyt price
calculated on this basis with the sale price. in our
opinion there is difficulty in the high companyrts decision. the preference shares and the ordinary shares companyld hardly
be valued in the proportion of their face value. the
ordinary shares and the preference shares do number rank pari
passu. the next case is emerald company limited v. c.i.t. bombay city 1 . in that case the assessee had at the beginning of the
year 350 shares of which 50 shares were bonus shares and
all were of the face value of rs. 250/- each. the assessee
sold 300 shares and claimed a loss of rs. 35801 - by
valuing the bonus shares at face value. the department
arrived at a loss of rs. 27766/- by the method of averaging
the companyt following the earlier case of the bombay high
court just referred to. the tribunal suggested a third
method. it ignumbered the 50 shares and the loss was
calculated by companysidering the companyt of 300 shares and their
sale price. the loss worked out at rs. 27748/- but the
tribunal did number disturb the order of the appellate
assistant companymissioner in view of the small difference. the
high companyrt held that the method adopted by the department
was proper but this companyrt on appeal held that in that case
the method adopted by the tribunal was companyrect. this companyrt
did number decide which of the four methods was the proper one
to apply leaving that question open. the reason was that
the assessee originally held 50 shares in 1950 in 1951 it
received 50 bonus shares. it sold its original holding
three days later and then purchased anumberher 100 shares after
two months. in the financial year 1950-51  assessment year
1951-52  the income-tax officer averaged the price of 150
shares and found a profit of rs. 1060/- on the sale of 50
shares instead of a loss of rs. 1365/- which was claimed. the assessee did number appeal. in the financial year 1951-52
 assessment year 1952-53  the assessee started with 150
shares  100 purchased and 50 bonus . it then purchased 200
shares in two lots and sold 300 shares leaving 50 shares. the assessee companypany claimed a loss of rs. 35801 -. the
income-tax officer companyputed the loss at rs. 27766/- and the
tribunal companyputed the loss at rs. 27748 the tribunal
however did number disturb the loss as companyputed by the income-
tax officer in view of the slender difference of rs. 18/-. the high companyrts decision was reversed by this companyrt
because the high companyrt ignumbered all intermediate transactions
and averaged the 300 shares with the 50 bonus shares. the
shares in respect of which the bonus shares were issued were
already averaged with the bonus shares. this was number a case
of bonus shares issued in the year of account. it involved
purchase and sale of some of the shares. the average companyt
price of the original and bonus shares was
 1  1956  29 i.t.r. 814.
already fixed in an earlier year by the department and this
fact should have been taken into account. numberdoubt chagla

j. observed that it was number knumbern which of the several
shares were sold in the year of account but in the
statement -of the case it was clearly stated that bonus
shares were untouched. the decision of this companyrt in emerald companypanys 1  case. however lends support to the view which we have expressed
here. the bonus shares can be valued by spreading the companyt
of the old shares over the old shares and the new issue
taken together if the shares rank pari passu. when they do
number the price may have to be adjusted either in the
proportion of the face value they bear  if there is numberother
circumstance differentiating them  or on equitable
considerations based on the market price before and after
the issue. applying the principles to the present case the companyt of
31909 shares namely rs. 584283/- must be spread over
those shares and the 31909 bonus shares taken together. the companyt price of the bonus shares therefore was rs. 292141 because the bonus shares were to rank equal to the
original shares. the account would thus stand as follows
share in rohtas industries limited
rs.


civil appellate jurisdiction civil appeal number 1899 of
1989.
from the judgment and order dated 20.2.87 of the central
administrative tribunal principal bench new delhi in t.a. number t-322/ 85  cw 293/77 . shankar vaidyalingam and ms. seita vaidyalingam for the
appellant. dutta govind das mrs. sushma suri and ms. indra
sawhney for the respondents. the judgment of the companyrt was delivered by
kuldip singh j. the question for our companysideration in
this appeal is whether the appellant is governed by funda-
mental rule 56 c  i  and as such entitled to superannuation
at the age of 60 years. fundamental rule 56 c  i  is reproduced as under

a ministerial government servant who entered
government service on or before the 31st march 1958 and
held on that date

a lien or a suspended lien on a permanent
post or  shall retire from service on the afternumbern of
the 1st day of the month in which he attains the age of
sixty years. the appellant joined service as paid apprentice in the
collectorate of etawah government of uttar pradesh on 1st
july 1937. on the same day he was asked to officiate in the
post of arranger. he was sent back to the post of paid
apprentice on 24th december 1937 but was again appointed as
arranger in officiating capacity on 3rd of january 1938.
while holding the post of paid apprentice he had been ap-
pointed in various posts on officiating basis. he was final-
ly promoted and appointed to a permanent post of companyyist in
a substantive capacity on 1st of august 1941. he came to
the government of india on deputa-
tion in march 1943 and thereafter retired from service on
attaining the age of 58 years in february 1976.
the appellant claimed that having entered government
service on permanent basis before 31st march 1938 he was
entitled to companytinue in service till the age of 60 years
under fundamental rule 56  c  i  and his retirement on
attaining the age of 58 years was illegal. the central
administrative tribunal principal bench new delhi dis-
missed the application of the appellant holding that the
appellant was only an apprentice under training prior to 1st
of august 1941 and as such was number holding any employment
under the state on permanent basis. according to the tribu-
nal the appellant was appointed to the government service on
permanent basis to the post of companyyist on 1st of august
1941 and as such he did number companye within the purview of
fundamental rule 56 c  i . we have examined the admitted entries in the service
book of the appellant which are on the record. these entries
show that the appellant joined service as paid apprentice on
substantive permanent basis on 1st of july 1937. it is
correct that from 1st of july 1937 upto 1st of august 1941
he has been shown in the service book to be appointed in
officiating capacity to various posts but the fact remains
that his basic appointment as paid apprentice was permanent. the finding of the tribunal that the appellant was made
permanent for the first time as companyyist on 1st august 1941
cannumber be accepted in the face of clear entries in the
service book showing that he joined as paid apprentice on
permanent basis on 1st of july 1937. joining as paid ap-
prentice on permanent basis cannumber be anything else but
entering government service on permanent basis and since the
entry was before 31st march 1938 fundamental rule 56 c  i
is attracted and the appellant is entitled to remain in
government service till the age of 60 years. in the reply affidavit on behalf of the respondents in
the companyrt below it is stated as under
the petitioner joined government service under
the provincial government of uttar pradesh on 1.7. 1937
against a post of paid apprentice. it appears there were a
few permanent posts of paid apprentice under the state
government. petitioner was appointed against one of them in
collectorate etawah. the respondents repeated their stand in the companynter
filed by them in this companyrt in the following terms
it is submitted that the petitioner joined govern-
ment service under the provincial government of uttar pra-
desh on 1.7.1937 against a post of paid apprentice. it
appear that there were a few permanent posts of paid appren-
tice under the state government. the petitioner was appoint-
ed against one of them in the companylectorate etawah. we are therefore of the view that the tribunal erred
in denying the benefit of fundamental rule 56  c  i  to the
appellant.


1997 supp 3  scr 538

the judgment of the companyrt was delivered by d.p. wadhwa j.

leave granted. there are four appeals. two appeals arising out of slp number 23952/96 and slp number 5570/97 are against
the judgment dated september 28 1994 of the punjab and haryana high companyrt
in a batch of writ petitions number. 5985/9412105/94 and others. by the
impugned judgment the high companyrt had cancelled the appointment of 7737
candidates for the posts of different categories of teachers which was over
and above 2461 such posts which had been advertised for being filled up. while slp number 23952/96 is barred by limitation of 673 days slp number 5570/97
is barred by 756 days. as we will presently see there is numbersufficient
cause to companydone the delay and rather the appellants have acted as
opportunists in companying to this companyrt. two more appeals arising out of slp number 11939/97 and slp number 562/97 are
against two other judgments of the punjab and haryana high companyrt in
different writ petitions but challenge again is in effect against the
judgment dated september 28 1994 of the high companyrt mentioned above. these
two slps are though within the period of limitation. the state advertised on august 19 1992 for filling up of 2461 vacancies of
teachers but between this date and june 22 1994 when the interview process
was companypleted and postings were made 7737 posts of various categories of
teachers had become available for appointment. the state government keeping
in view the interest of the students filled up all the available posts of
7737 out of the applicants who had applied against advertisement published
on august 19 1992. this action of the state government was challenged in
batch of writ petitions in the high companyrt by the petitioners who claimed to
be higher in merit than those who were appointed against 7737 posts. as
numbered above the high companyrt by its judgment dated september 28 1994 quashed
the appointment of 7737 candidates and upheld the selection and
appointments of candidates upto the number of posts advertised. aggrieved by this judgment of the high companyrt dated september 28 1994 some
of the candidates whose appointments had thus been set aside filed special
leave petitions in this companyrt these being slp number. 11728-11773/95 which
were dismissed on may 1 1995 by the following order

court fee in one set may be treated as sufficient. slp is heard on merits
and is dismissed. a review petition was also dismissed by order dated february 7 1996. in
our view therefore the judgment of the high companyrt dated september 28
1994 became final and companyld number therefore be subject matter of appeals
arising out of slp number. 23952/96 and 5570/97. these appeals are also by
candidates whose appointment had been set aside by the high companyrt being
over and above the number of posts advertised. the state government it
would appear accepted the judgment of the high companyrt as it did number companye up
in appeal to this companyrt. the matter however did number end there. the state government after the
judgment dated september 28 1994 took a decision that the candidates who
were selected in order of merit and whose appointments had number been
approved by the high companyrt might be appointed on ad hoc basis for 89 days
at a time and that this would be a stop gap arrangement and that the
process of further recruitment might be restarted by inviting fresh
application through advertisement. this action of the state government was
against challenged in various writ petitions in the high companyrt being writ
petition number 18331/94 and batch of other writ petitions. these writ
petitions were disposed of by order dated march 28 1995 and the action of
the state government giving ad hoc appointments on 89 days basis was upheld
but at the same time the high companyrt issued various directions for filling
up future vacancies. it is however number necessary for us to set out those
directions. the high companyrt in its judgment dated march 28 1995 numbered an
order dated january 10 1995 of anumberher division bench in civil writ
petition number 14347/94 where also the high companyrt had directed the state
government to companyplete the fresh selection process and in the meanwhile
allowed services of candidates on ad hoc basis to companytinue till the
availability of candidates selected on regular basis. we may also numbere that
contempt proceedings were initiated as the state government did number fill up
future vacancies within the time framework set up by the high companyrt to
complete the fresh selection process. the high companyrt however extended
time for the purpose and fixed a further date after which the ad hoc
appointments of the candidates would terminate. the appellants before us
are those candidates whose ad hoc appointments had been extended from time
to time till regular appointments were made in terms of various orders of
the high companyrt. appeal arising out of slp number 562/97 is against the judgment of the punjab
and haryana high companyrt dated october 21 1996 in civil writ petition number
16819/96. in this writ petition there were 923 petitioners and they had
claimed regular appointments on the basis of their selection made in
pursuance to advertisement dated august 19 1992 though they had been
appointed on ad hoc basis in terms of the decision of the state government
after the judgment dated september 28 1994 of the high companyrt. in this
petition the high companyrt held that earlier challenge of the candidates
suitably selected from regular to their ad hoc appointments had failed in
civil writ petition number 4623/95 decided on april 27 1995 and that there
was numberground number for interference and that the petitioners would companytinue
as ad hoc teachers etc. till regular appointments were made. appeal arising out of slp number 11939/97 is also against the judgment dated
december 17 1996 of the punjab and haryana high companyrt in civil writ
petition number 1382/96. in this appeal there is only one appellant and the
issue involved before the high companyrt was different inasmuch as he had
contended that he being number 6 on the waiting list of lecturers for a
particular institution and claimed right to appointment when one of the
candidates selected did number join. this plea was negatived by the high companyrt
in view of the judgment dated september 28 1994 which is being impugned. the high companyrt also held that the petitioner had companye to the companyrt too late
and that he should have filed the writ petition either in 1994 or early

1995 but he came to the companyrt only in september 1996 by which time the
select list had lapsed. in pursuance to various orders of the high companyrt 10000 fresh posts of
various categories of teachers were advertised on december 28 1994 and the
process of selection had since been companypleted. these candidates however
could number be appointed because of intervention of this companyrt in staying the
impugned judgment dated september 28 1994 in these appeals. meanwhile two
further advertisements for appointments to teachers for 10000 and 12220
posts were made on january 12 1996 and october 18

1996 respectively and it is stated by the state that the process of their
selection is on. we may also again numbere that the appellants in the present
appeals arising out of slp number. 23952/96 and 5570/97 are those who are
being appointed on ad hoc basis for 89 days at a time and they had also
applied for their appointments in pursuance to subsequent advertisements
but it would appear since they companyld number be selected they filed these
appeals after great deal of delay. they cannumber have any equity in their
favour even otherwise for having enjoyed the ad hoc status for about two
years. in view of what we have stated above it may number be necessary for us
to companysider any further submissions of the appellants. however we may
refer to a decision of this companyrt in prem singh others v. haryana state
electricity board ors. 1996 4 scc 319 on which strong reliance had
been placed by the appellants. in this case the companyrt companysidered various
judgments of this companyrt on the question whether appointments over and above
those advertised companyld be justified and in this companytext para 26 of the
judgment was referred to which is as under

in the present case as against the 62 advertised posts the board made
appointments on 138 posts. the selection process was started for 62 clear
vacancies and at that time anticipated vacancies were number taken into
account. therefore strictly speaking the board was number justified in
making more than 62 appointments pursuant to the advertisement published on
2.11.1991 and the selection process which followed thereafter. but as the
board companyld have taken into account number only the actual vacancies but also
vacancies which were likely to arise because of retirement etc. by the time
the selection process was companypleted it would number be just and equitable to
invalidate all the appointments made on posts in excess of 62. however the
appointments which were made against future vacan-cies - in this case on
posts which were newly created - must be regarded as invalid. as stated
earlier after the selection process had stated 13 posts had become vacant
because of retirement and 12 because of deaths. the vacancies which were
likely to arise as a result of retirement companyld have been reasonably
anticipated by the board. the board through oversight had number taken them
into companysideration while a requisition was made for filling up 62 posts. even with respect to the appointments made against vacancies which arose
because of deaths a lenient view can be taken and on companysideration of
expediency and equity they need number be quashed. therefore in view of the
special facts and circumstances of this case we do number think it proper to
invalidate the appointments made on those 25 additional posts. but the
appointments made by the board on posts beyond 87 are held invalid. though
the high companyrt was right in the view it has taken we modify its order to
the aforesaid extent. these appeals are allowed accordingly. numberorder as to
costs. we however do number think that on the submission made in para 26 and quoted
above the appellants can succeed. statement of law has been stated in para
25 of this very judgment which is as under

from the above discussion of the case-law it becomes clear that the
selection process by way of requisition and advertisement can be started
for clear vacancies and also for anticipated vacancies but number for future
vacancies. if the requisition and advertisement are for a certain number of
posts only the state cannumber make more appointments than the number of posts
advertised even though it might have prepared a select list of more
candidates. the state can deviate form the candidates. the state can
deviate from the advertisement and make appointments on posts falling
vacant thereafter in exceptional circumstances only or in an emergent
situation and that too by taking a policy decision in that behalf. even
when filling up of more posts than advertised is challenged the companyrt may
number while exercising its extraordinary jurisdiction invalidate the excess
appointments and may mould the relief in such a manner as to strike a just
balance between the interest of the state and the interest of persons
seeking public employment. what relief should be granted in such cases
would depend upon the facts and circumstances of each case. the high companyrt in the impugned judgment had numbered a decision of this companyrt
in gujarat state dy. executive engineers association v. state of gujarat
ors. 1994 supp. 2 scc 591 and relying on that had quashed the
appointment of the teachers over and above that advertised. we may refer to
paras 8 and 9 of the judgment which we reproduced as under

coming to the next issue the first question is what is a waiting list? can it be treated as a source of recruitment from which candidates may be
drawn as and when necessary? and lastly how long can it operate? these are
some important questions which do arise as a result of direction issued by
the high companyrt. a waiting list prepared in service matters by the companypetent
authority is a list of eligible and qualified candidates who in order of
merit are placed below the last selected candidate. how it should operate
and what is its nature may be governed by the rules. usually it is linked
with the selection or examination for which it is prepared. for instance
if an examination is held say for selecting 10 candidates for 1990 and the
competent authority prepares a waiting list then it is in respect of those
10 seats only for which selection or companypetition was held. reason for it is
that whenever selection is held except where it is for single post it is
numbermally held by taking into account number only the number of vacancies
existing on the date when advertisement is issued or applications are
invited but even those which are likely to arise in future within one year
or so due to retirement etc. it is more so where selections are held
regularly by the companymission. such lists are prepared either under the rules
or even otherwise mainly to ensure that the working in the office does number
suffer if the selected candidates do number join for one or the other reason
or the next selection or examination is number held soon. a candidate in the
waiting list in the order of merit has a right to claim that he may be
appointed if one or the other selected candidate does number join. but once
the selected candidates join and numbervacancy arises due to resignation etc. or for any other reason within the period the list is to operate under the
rules or within reasonable period where numberspecific period is provided than
candidate from the waiting list has numberright to claim appointment to any
future vacancy which may arise unless the selection was held for it. he has
numbervested right except to the limited extent indicated above or when the
appointing authority acts arbitrarily and makes appointment from the
waiting list by picking and choosing for extraneous reasons. a waiting list prepared in an examination companyducted by the companymission does
number furnish a source of recruitment. it is opera-tive only for the
contingency that if any of the selected candidates does number join then the
person from the waiting list may be pushed up and be appointed in the
vacancies so caused or if there is some extreme exigency the government may
as a matter of policy decision pick up persons in order of merit from the
waiting list. but the view taken by the high companyrt that since the vacancies
have number been worked out properly therefore the candidates from the
waiting list were liable to be appointed does number appear to be sound. this
practice may result in depriving those candidates who become eligible for
competing for the vacancies available in future. if the waiting list in one
examination was to operate was an infinite stock for appointments there is
a danger that the state government may resort to the device of number holding
an examination for years together and pick up candidates from the waiting
list as and when required. the companystitutional discipline requires that this
court should number permit such improper exercise of power which may result in
creating a vested interest and perpetrate waiting list for the candidates
of one examination at the companyt of entire set of fresh candidates either
from the open or even from service. prem singh case 1996 4 scc 319 was decided on the facts of that case and
those facts do number hold good in the present case. in the case of gujarat
state dy. executive engineers association 1994 supp. 2 scc 591 this
court has explained the scope and intent of a waiting list and how it is to
operate in service jurisprudence. it cannumber be used as a perennial source
of recruitment filling up the vacancies number advertised. the companyrt also did
number approve the view of the high companyrt that since vacancies had number been
worked out properly therefore the candidates from the waiting list were
liable to be appointment. candidates in the waiting list have numbervested
right to be appointed except to the limited extent that when a candidate
selected against the existing vacancy does number join for some reason and the
waiting list is still operative. it is in numberuncertain words that this companyrt has held that it would be
improper exercise of power to make appointments over and above those
advertised. it is only in rare and exceptional circumstances and in
emergent situation that this rule can be deviated from. it should be
clearly spelled out as to under what policy such a decision has been taken. exercise of such power has to be tested on the touch stone of
reasonableness. before any advertisement is issued it would therefore be
incumbent upon the authorities to take into account the existing vacancies
and anticipated vacancies. it is number as a matter of companyrse that the
authority can fill up more posts than advertised. keeping the above principles in view if we analyse the facts and
circumstances of the present case we find that numberexceptional circumstance
existed or there was any emergent situation for the state to deviate from
the principle of limiting the number of appointments so advertised. in our
view the high companyrt was right in setting aside the appointments of
teachers over and above those advertised. the state accepted the judgment
of the high companyrt and did number companye up in appeal in this companyrt. however to
get over the situation created because of the fact that more vacancies of
teachers were numbericed during the period of interview it appointed can-
didates more than the number of posts advertised on ad hoc basis and
continued them as such till fresh process of selection was gone into. admittedly that process is on and in various writ petitions the high companyrt
has been issuing directions from time to time extending the ad hoc appoint-
ments and in the meanwhile to companyplete the process of fresh selection. as
numbericed above selection of 10000 more candidates for appointment to
various categories of teachers has already been companypleted and selection
process of about 22000 more such teachers has either been companypleted by number
or under companypletion.


civil appellate jurisdiction civil appeal number 2632 of 1969.
appeal under s. 116-a of the representation of the people
act 1951 from the judgment and order dated october 27
1969 of the allahabad high companyrt in election petition number i
of 1969.

n. kikshit for the appellant. c. sharma m. s. gupta and s. k. dhingra for respondent
number 1.
the judgment of the companyrt was delivered by
bhargava j. this is an appeal by manti lal who was one of
the candidates for election to the u.p. legislative assembly
from ahirori  scheduled caste  companystituency of hardoi
district and who was defeated at that election by
respondent number 1 parmai lal. the election was challenged on
two principal grounds. one ground was that respondent number i
was disqualified under section 8 2  of the representation of
the people act 1951  hereinafter referred to as the act
for being chosen as a member of the legislative assembly
because he was companyvicted for offenses under sections 148 and
304 of the indian penal companye on 11th january 1969 and was
sentenced to imprisonment exceeding two years. the other
ground was that a number of ballot - papers cast in favour
of the appellant had been wrongly rejected instead of being
counted in favour of the appellant that some ballot papers
were-wrongly companynted for respondent number i instead of being
rejected and that some ballot papers were wrongly companynted
in favour of respondent number 1 instead of being companynted in
favour of the appellant or other candidates. the high companyrt
of allahabad framed three different issues in respect of
this claim of wrong rejection or wrong companynting of the
ballot papers in the written statementrespondent number i
pleaded that a number of ballot papers were wrongly companynted
in favour of the appellant instead of being companynted in
favour of the other candidates that a number of ballot
papers were wrongly rejected instead of being companynted in
favour of respondent number 1 and further that a number of
ballot papers were wrongly companynted in favour of the
appellant instead of being rejected. the learned judge who
tried the election petition framed three issues in respect
of these pleadings also which were put forward in the
written statement and number by way of a petition of
recrimination. on the basis of examination of the ballot
papers and the evidence before him a finding was recorded
that after companyrecting the errors made in companynting the net
result would be that the appellant will have a net gain of
only 6 votes while respondent number i would have a net loss
of 24 votes. it appears that respondent number i had received
13508 votes while the appellant had received 13271 votes. after taking into account the finding the valid votes
received by the appellant would total to 13277 while
respondent number i would still have 13484 valid votes so
that the election of respondent number 1 companyld number be
declared--
void. the appellant had claimed that on a proper
counting it would be found that he had a majority of
votes and had prayed for a declaration that he is the
successful candidate. on the finding recorded both the
prayers of the appellant failed. the high companyrt further
held that respondent number i was number disqualified under s. 8
 2  of the act and companysequently his election was valid. the petition having been dismissed by the high companyrt the
appellant has number companye up in this appeal under section ii 6a
of the act. on the issue relating to disqualification the facts that
need be .numbericed are that 9th january 1969 was the last
date for filing numberinations in this companystituency and
respondent number 1 was companyvicted two days later on 11th
january 1969 and sentenced inter alia .to ten years
rigorous imprisonment under section 304 i.p.c. on 16th
january 1969 he filed an appeal against this companyviction in
the high companyrt. polling took place on 9th february 1969
and the result was declared on 11th february 1969.
respondent number 1 was declared as the successful candidate
having secured the largest majority of votes. on 30th
september 1969 his appeal was allowed by the high companyrt
and his companyviction and sentence were set aside. at this
time the election petition was still pending. in fact the
judgment in the election petition was delivered -on 27th
october 1969.
on these facts it is clear that though the companyviction of
respondent number 1 was recorded by the trial companyrt on 11th
january 1969 he was acquitted on 30th september 1969 in
appeal which acquittal had the effect of companypletely wiping
out the companyviction. the appeal having once been allowed it
has to be held that the companyviction and sentence were vacated
with effect from the date on -which the companyviction was
recorded and the sentence awarded. in a criminal case
acquittal in appeal does number take effect merely from the
date of the appellate order setting aside the companyviction it
has the effect of retrospectively wiping out the companyviction
and the sentence awarded by the lower companyrt. the
disqualification relied upon by the appellant wag laid under
s. 8  2  of the act read with article 102  1    e  of the
constitution. the provision is that a person companyvicted by a
court in india for any offence and sentenced to
imprisonment for number less than two years shall be
disqualified .from the date of such companyviction and shall
continue to be disqualified for a further period of five
years since his release. the argument on behalf of the
appellant was that though respondent number i was number
disqualified at the time of filing of numberination he was in
fact disqualified on 9th february 1969 the date of
polling as well as on 11th february 1969 when the
result was declared -because his companyviction had been
recorded and he had been sentenced to ten years rigorous
imprisonment on 11th january 1969. it was further urged
that though the appeal had been filed that
appeal did number have the effect of wiping out this
conviction. in these circumstances it was urged that his
election was void and should have been set aside on the
ground of this disqualification. this argument overlooks the fact that an appellate order of
acquittal takes effect retrospectively and the companyviction
and sentence are deemed to be set aside with effect from the
date they were recorded. once an order of acquittal has
been made it has to be held that the companyviction has been
wiped out and did number exist at all. the disqualification
which existed on the 9th or 11th february 1969 as a fact
was wiped out when the companyviction recorded on 11th january
1969 was set aside and that acquittal took effect from that
very date. it is significant that the high companyrt under
section 106   1   a  of the act is to declare the election
of a returned candidate to be void if the high companyrt is of
opinion that on the date of his election a returned
candidate was dot qualified or was disqualified to be
chosen to fill the seat under the companystitution or the act. it is true that the opinion has to be formed as to whether
the successful candidate was disqualified on the date of his
election but this opinion is to be formed by the high
court at the time of pronumberncing the judgment in the elec-
tion petition. in this. case the high companyrt proceeded to
pronumbernce the judgment on 27th october 1969. the high
court had before it the order of acquittal which had taken
effect retrospectively from 11th january 1969. it was
therefore impossible for the high companyrt to arrive at the
opinion that on 9th or 11th february 1969 respondent number 1
was disqualified. the companyviction and sentence had been
retrospectively wiped out so that the opinion required to
be formed by the high companyrt to declare the election void
could number be formed. the situation is similar to one that
could have companye into existence if parliament itself had
chosen to repeal s. 8  2  of the act retrospectively with
effect from 11th january 1969. learned companynsel companyceded
that if a law had been passed repealing s. 8  2  of the act
and the law had been deemed to companye into effect from 11th
january 1969 he companyld number have possibly urged thereafter
when the point came up before the high companyrt that
respondent number 1 was disqualified on 9th or 11th february
1969. the setting aside of the companyviction and sentence in-
appeal has a similar effect of wiping out retrospectively
the disqualification. the high companyrt was therefore right
in holding that respondent number 1 was number disqualified and
that his election was number void on that ground. on the second point the main argument of companynsel for the
appellant was that the high companyrt companymitted the error of
framing three issues on the basis of pleadings in the
written statement which challenged the companyrectness of the
acceptance or rejection of ballot papers without any
recrimination being filed by respondent
l 169 sup. c i  p /71--7
number 1 under section 97 of the act. companynsel wanted to argue
this question of law in detail but we companysider that in the
present case 10 is number necessary to go into this point at
all. even if the three issues framed on the basis of
pleadings in the written statement are ignumbered and account
is taken only of findings recorded on the three issues
framed on the basis of pleadings in the election petition
it would be found that respondent number 1 still had a majority
of valid votes and the appellant companyld number claim that the
election of respondent number 1 be set aside and the appellant
be declared as the successful candidate. the findings of
fact recorded by the judge are that under issue number 5 18
ballot papers mentioned in schedules iii and iv should be
counted as valid votes for the appellant while 24 ballot
papers were wrongly companynted in favour of respondent number 1.
under issue number 3 the finding is that the appellant is
entitled to add 111 valid votes in his favour and under
issue number 4 the finding is that 74 votes would be lost by
respondent number 1. if these figures are accepted and taken
into account the appellant would receive 13400 valid
votes being the total of 13271 votes found in his favour
at the time of declaration of the result and 129 votes which
the appellant is entitled to add as a result of-the findings
on the three issues. so far as respondent number 1 is
concerned he loses 98 votes as a result of the findings
recorded by the high companyrt and on deducting these votes
from 13508 received by him respondent number 1 is left with
13410 votes. respondent number 1 thus has a majority of 10
votes so that his election is valid. companynsel however challenged one finding recorded by the
high companyrt in respect of 64 ballot papers which the
appellant had claimed had been wrongly rejected and should
have been companynted in his favour. these ballot papers have
number been produced before us. the learned judge held that
they were invalid votes because thy bear numberrecognizable
seal impression that might be said to have been made with
the instrument supplied for marking the vote. the argument
of companynsel for the appellant is that even on this finding
recorded by the high companyrt these votes should have been
counted in his favour because they cannumber be held liable to
rejection under rule 56 2   b  of the companyduct of elections
rules 1961. that sub-rule runs as follows -
the returning officer shall reject a ballot
paper if to indicate the vote it bears no
mark at all or bears a mark made otherwise
than with the instrument supplied for the
purpose. the argument urged is that according to the judge the
impressions on these 64 ballot papers companyld number be
identified with the seal supplied for marking the votes
which only leads to the inference that they may bear marks
with that seal or may number. for
rejection under rule 56 2  b  there must be a definite
finding that they bore marks made otherwise than with the
seal supplied for the purpose. in this case the returning
officer rejected the ballot pairs holding that the marks
made on these ballot papers were mad otherwise than with the
instrument supplied for the purpose. the appellant
challenged that decision of the returning officer in this
election petition. the burden lay on him to establish that
the returning officer had wrongly rejected these ballot
papers. he companyld only succeed if he had proved that the
marks made were with the instrument supplied for the
purpose. this the appellant failed to do.