k. das j.

i had taken a view different from that of my learned brethren when this appeal was heard along with pingle industries limited secunderabad v. companymissioner of income-tax and that view was expressed in a very short judgment dated april 26 1960.

number we have had the advantage of hearing a very full argument with regard to the facts of this appeal and i for myself have had the further advantage and privilege of reading the judgment which my learned brother hidayatullah j. is proposing to deliver in this appeal. i have very carefully companysidered the question again with reference to the facts relating thereto and much to my regret have companye to the companyclusion that i must adhere to the opinion which i expressed earlier. my view is that the fact of this case are indistinguishable from the facts on which the decision of the privy companyncil in mohanlal hargovind v. companymissioner of income-tax was rendered and on the principles laid down by this companyrt in assam bengal cement company limited v. companymissioner of income-tax it must be held that the expenditure of rs. 6111 in this case was on revenue account and the respondent firm was entitled to the allowance which it claimed. the short facts are these. the respondent firm carried on a business in the purchase and sale of companych shells  called chanks . it used to acquire the stock of companych shells by  1  purchase from divers  2  by purchase from the fisheries department of the government of madras and  3  by fishing for and gathering such shells from the sea. it disposed of the stock so acquired at calcutta the difference between the companyt price and selling price less expenses being its profit made in business. on numberember 9 1945 it took on lease from the director of industries and companymerce madras the exclusive right liberty land authority of fish for take and carry away all chank shells in the sea off the companyst line of the south arcot district including the french kuppams of pondicherry. the boundary of the area within which the right companyld be exercised was given in schedule to the lease. the lease was for a period of three years from july 1 1944 to june 30 1947 on a companysideration of an yearly rent of rs. 6111/- to be paid in advance. clause 3 of the lease companytained the material terms there of and may be set out in full. the lease hereby companyenants with the lessor as follows

to pay the rent on the day and in the manner aforesaid. to deliver to the assistant director of pearl and chank fisheries tuticorn all valampiri shells that may be obtained by the lessee upon payment of their value as determined by the assistant direct. to companylect chanks caught in nets and by means of diving as well. in the process of such companylection shells number to fish chanks shells less than 2 1/4 inches in diameter and if any chank shells less than 2 1/4 inches in diameter be brought inadvertently to shore to return at once live to the sea all such to the sea all much undersized shells. number at any time hereafter to transfer or under let or part with possession of this grant or the rights and privileges hereby granted or any part thereof without the written companysent of the lessor. at the end or sooner determination of the term hereby created peaceable and quietly yield to the lessor the rights and privileges hereby granted and

to report to the assistant director of pearl and chank fisheries  south  tuticorin the actual number of shells kept unsold in different stations after the expiry of the lease period. for the assessment year 1946-47 the respondent firm submitted a return of its income to the income-tax officer karaikudi circle showing its income from sale of chanks purchased from divers at rs. 7194 by sale of chank purchased fork government department at rs. 23588 and rs. 2819 by sale of chanks gathered by themselves  through divers  after deducting rs. 6111 being the rent paid to government under the companytract referred to above. it sought to deduct rs. 6111 from its profits from business on the ground that this was an expenditure number of a capital nature but wholly and exclusively laid out for the purpose of disallowed by the income-tax officer and on appeal by the appellate assistant companymissioner. on further appeal to the appellate tribunal the respondent firm companytended that the decision of the privy companyncil in mohanlal hargovind v. companymissioner of income- tax applied to this case inasmuch as the payment was to secure the stock-in-trade for its business. the appllate tribunal was of the opinion that the privy companyncil decision companyered the case but felt itself bound by the decision of the full bench of the madras high companyrt in abdul kayum hussain sahib v. companymissioner of income-tax madras 1939-7 itr 652  mad  fb . the tribunal acceded to the demand for a reference to the high companyrt and accdordintgly referred the following question to the high companyrt for its decision. whether on the facts and circumstances of the case the payment of the sum of rs. 6111 made by the assessee under the terms of the agreement entered into with the director of industries and companymerce madras on 9th numberember 1945 was number an item of revenue expenditure incurred in the companyrse of carrying on the business of the assessee and therefore allowable under the provisions of section 10 of the indian income-tax act ? the reference first came before a division bench and was then referred to a full bench. by its judgment dated april 2 1953 the full bench answered the question in favour of the respondent firm. on a certificate of fitness granted by the high companyrt the companymissioner of income-tax madras brought the present appeal to this companyrt. in assam bengal cement company limited v. companymissioner of income-tax this companyrt referred to the decision in benarsidas jagannath in re and accepted the following broad principles for the purpose of discriminating between a capital and a revenue expenditure. the outlay is deemed to be capital when it is made for the initiation of a business for extension of a business or for a substantial replacement of equipment.  see companymissioners of inland revenue v. granite city steamship companypany limited . such expenditure is regarded as on capital account for it is incurred number in earning profits but in setting the profit-earning machinery in motion. in my opinion this test does number apply in the present case where numberprofit- earning machinery was set in motion. expenditure may be treated as properly attributable to capital when it is made number only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade  see atherton v. british insulated and helsby cables limited . in elucidation of this principle it has been laid down in several decisions that by enduring is meant enduring in the way that fixed capital endures and it does number companynumbere a benefit that endures in the sense that for a good number of years it relieves the assessee of a revenue payment. in robert addie and sons companylieries limited v. companymissioner of inland revenue lord clyde formulated the same test in these words
what is money wholly and exclusively laid out for the purposes of the trade is a question which must be determined upon the principles of ordinary companymercial trading. it is necessary accordingly to attend to the true nature of the expenditure and to ask ones self the question it is a part of the companypanys working expenses ? - is it expenditure laid out as part of the process of profit - earning ? - or on the other hand is it a capital outlay ? - is it expenditure for the acquisition of property or of a permanent character the possession of which is a companydition of carrying on its trade at all ? this test was adverted to by the privy companyncil in tata hydro electric agencies limited v. companymissioner of income-tax. in my opinion the application of this test makes it at once clear that the sum of rs. 6111 which the respondent firm spent was expenditure laid out as part of the process of profit-earning it was number a capital outlay that is expenditure necessary for the acquisition of property or of rights of a permanent character the possession of which was a companydition of carrying on its trade. under the companytract in question the respondent firm did number acquire any right to immovable property. it acquire numberright in the bed of the sea or in the sea. the only right companyferred on the respondent firm was the right to fish for gather and carry away companych shell  in motion under the surface of the sea  of a specified type and size. the respondent firm was under an obligation to return to the sea companych shells less than 2 1/4 inches in diameter. the business of the respondent firm companysisted in buying and selling companych shells numbermanufacturing process was involved in it. there fore the stock-in-trade of the respondent firm was companych shells. it secured this stock-in-trade in many different ways by purchase from divers by purchase from government and private parties and also by gathering companych shells under the companytract into which the respondent firm entered was merely for securing its stock-in-trade. it is indeed true that in companysidering whether an item of expenditure is incurred. the true nature of the transaction must be companylected from the entire document with reference to all relevant facts and circumstance. having regard to the nature of the respondent firms business and the companyrse adopted by it for carrying it on it appears to me to be rather far-fetched to hold that by the companytract in question the respondent firm acquired property or right of a permanent character the possession of which was a companydition of carrying on its trade. to me it seems that the better view in a business sense is that the respondent firm merely acquired by means of the companytract its stock-in-trade rather than a source or enduring asset for producing the stock-in-trade. it was argued before us as it was argued in the high companyrt that what was acquired in the present case was the means of obtaining the stock- in-trade for the business rather than the stock-in-trade itself. i am unable to accept this argument as companyrect. the companytract entered into by the respondent firm was wholly and exclusively for the purpose of obtaining companych shells which were its stock-in-trade. as i have stated earlier the companytract granted numberinterest in the sea sea bed or sea water etc. it was simply a companytract giving the grantee the right to pick and carry away companych shells of a specified type and size which of companyrse implied the right to appropriate them as its own property. in my opinion in a case of this nature numberdistinction can be drawn in a business sense between the right of picking and carrying away companych shells and the actual buying of them. it is number unusual for business men to secure by means of a companytract a supply of raw materials or of goods which form their stock-in-trade extending over several years for the payment of a lump sum down. even if the companych shells were stored in a godown and the respondent firm was given a right to go and fetch them and so reduce them into its ownership it companyld scarcely have been suggested that the price paid was capital expenditure. i may explain what i have in mind by giving a simple illustration. take the case of a fisherman who sells fish. fish is his stock-in-trade. he may buy the fish he requires from other persons or he may obtain the supply of fish he requires by catching the fish of a specified size and type in particular waters over a short period away. i do number think that in a business sense any distinction can be made between the two means of obtaining the stock-in-trade. both really amount to securing the stock-in-trade. and a business man like the fisher man in the illustration given above would indeed be surprised to learn that buying of fish for his business is revenue expenditure whereas catching fish in particular waters under a companytract entered into by him for the purpose of obtaining his stock-in-trade on payment of a lump sum down is capital expenditure. the test whether for the purpose of the expenditure any capital was withdrawn or in other words whether the object of incurring the expenditure was to employ what was taken in as capital of the business does number arise in the present case and need number be companysidered. numberdifferent principles were laid down by my learned brethren in their decision in pingle industries limited v. companymissioner of income-tax and so far as that case is companycerned their decision must hold the field. the difficulty and difference of opinion that arise number relate to the application of those principles to the facts of the present case. one is reminded in this case of what lord macmillan said in tata hydro -electric agencies limited v. companymissioner of income-tax at page 209
their lordships recognise and the decided cases show how difficult it is to discriminate between expenditure which is and expenditure which is number incurred solely for the purpose of earning profits or gains. lord greene  master of the rolls  expressed himself more strongly and adverting to the distinction between capital and income said
 there have been since many cases where this matter of capital or income has been debated. there have been many cases which fall upon the borderline indeed in many cases it is almost true to say that the spin of a companyn would decide the matter almost as satisfactorily as an attempt to find reasons.  vide companymissioners of inland revenue v. british salmson aero engines limited . perhaps the case before us is number as bad as the cases which the master of the rolls hand in mind when he made the above observations. it is however a truism that each case must turn upon its own facts. nevertheless the decisions are useful as illustrations of some relevant general principles. the nearest illustration that we can get is the decision of the privy companyncil in mohanlal hargovind v. companymissioner of income-tax. that decision was binding on the indian companyrts at the time when it was given and as i think that it is still good law and is indistinguishable from the present case i offer numberapology for referring to it in great detail. the facts of that case were these. the assessees there carried on a business at several places as manufacturers and vendors of companyntry-made cigarettes knumbern as bidis. these cigarettes were companyposed of tobacco rolled in leaves of a tree knumbern as tendu leaves which were obtained by the assessees by entering into a number of short term companytracts with the government and oth d exclusively for the purpose of supplying themselves with one of the raw materials of their business that they granted numberinterest in land or in the trees or plants that under them it was the tendu leaves and numberhing but the tendu leaves that were acquired that the right to pick the leaves or to go on to the land for the purpose was merely ancillary to the real purpose of the companytracts and if number expressed would be implied by law in the sale of a growing crop and that therefore the expenditure incurred in acquiring the raw material was in business sense an expenditure on revenue account and number on capital just as much as if the tendu leaves had been bought in a shop. i can find numberdistinction which should make any difference between the facts of that case and the facts of the present case. let me companypare the essential facts of these two cases and see whether there is any difference. two of the companytracts were taken as typical of the rest by the privy companyncil. one companytract was for the period from september 5 1939 to june 30 1941 and the other was for the period from october 1 1938 to june 30 1941. thus one of the companytracts was for a period of about two years and the other companytracts was for a period of about three years. in the case under our companysideration the period of the companytract is three years. indeed there is numbervital difference between the periods in the two cases. in the cases before us the companytract area is described in a schedule. in the two companytracts which were under companysideration by the privy companyncil the companytract area was also indicated in a schedule. the boundaries of the forests in which tendu leaves companyld be plucked were delimited by the schedule. same is the case with the companytract before us. the companytract area in which companych shells of a specified type and size can be picked and gathered is described in a schedule. such description does number mean that the assessee gets any right other than the right together companych shells. in the privy companyncil case the assessees were granted numberinterest in land or in the trees or plants it was the tendu leaves and numberhing but the tendu leaves that were acquired. in the case before us numberinterest was given in the sea bed or in the sea water or in any of the products thereof. companych shells of a specified type and size and numberhing but such companych shells were acquired by the companytract. i do number think that the reference tothe companyst line off the south arcot district makes any difference between the present case and the case on which the decision in mohanlal hargovind v. companymissioner of income-tax  1  was rendered. if in the matter of plucking of tendu leaves the expenditure under the companytract was in a business sense expenditure on revenue account i fail to see why a similar expenditure for gathering companych shells in motion under the surface of the sea near the companyst line should number in a business sense be companysidered as expenditure on revenue account. this aspect of the case was emphasised by their lordships in the following paragraph
it appears to their lordships that there has been some misapprehension as to the true nature of these agreements and they wish to state at once what in their opinion is and what is number the effect of them. they are merely examples of many similar companytracts entered into by the appellants wholly and exclusively for the purpose of their business that purpose being to supply themselves with one of the raw materials of that business. the companytracts grant numberinterest in land and numberinterest in the trees or plants themselves. they are simply and solely companytracts giving to the grantees the right to pick and carry away leaves which of companyrse implies the right to appropriate them as their own property. in the case under our companysideration the only right granted to the respondent firm was to take and carry away companych shells of a specified type and size which of companyrse implies the right to appropriate them as the respondent firms own property. the right to go into the sea and cast nets etc. was merely ancillary to the real purpose of the companytract. number do i think that the circumstance that the companytract companyferred and exclusive privilege or right is a matter of any significance. in mohanlal hargovind v. companymissioner of income-tax the companytracts were exclusive and their lordships stated
it is true that the rights under the companytracts are exclusive but in such a case as this that is a matter which appears to their lordships to be of numbersignificance. these observations are as apt in their application to the present case as they were in the case before their lordships of the privy companyncil. the privy companyncil drew a distinction between cases relating to the purchase or leasing of mines quarries deposits deposits of brick earth land with standing timber etc. on on side and the case under its companysideration on the other. it referred to the decision in alianza company v. bell and said
the present case resembles much more closely the case described and distinguished by challnell j. at page 673 of the report in alianza company v. bell of the companyt of material worked up in a manufactory. that said the learned judge is a current expenditure and does number become a capital expenditure merely because the material is provided by something like a forward companytract under which a person for the payment of a lump sum down secures a supply of the raw material for a period extending over several years. in kauri timber company limited v. companymissioner of taxes the companypanys business companysisted in cutting and disposing of timber. it acquired in some cases timber bearing lands in other cases it purchased the standing timber. the leases were for 99 years. so far as the case where the land was acquired were companycerned there companyld have been numberdoubt that the expenditure made in acquiring it was capital expenditure. in the case of the purchase of the standing timber what was acquired was an interest in land. the purchasers bought the trees which they companyld allow to remain standing as long as they liked. it was pointed out that so long as the timber at the option of the companypany remained upon the soil it derived its sustenance and nutriment from it. the additional growths became ipso jure the property of the companypany. in these circumstances it was held that the expenditure was capital expenditure. in the case before us some reliance was placed by the appellant on the term that shells less then 2 1/4 inches in diameter or more. this it was argued brought the present case nearer the decision in kauri timber case 1913 ac 771. i am unable to agree. it is to be remembered that live shells move under the surface of the sea and they do number remain at the same place as trees do. a shell less than 21/4 inches in diameter returned alive to the sea may move away from the companytract area an may never be gathered by the respondent firm. in these circumstances the appellant is number entitled to call to his aid the test of further vegetation or sustenance nutriment referred to in the kauri timber case 1913 ac 771.

from whatever point of view we may look at the case it seems to me that the facts of the present case are indistinguishable from those of the case mohanlal hargovind v. companymissioner of income-tax. in mohanlal hargovinds case 3 the right was to pluck tendu leaves in our case the right is to gather companych shells of specified type an size. this companytended on behalf of the appellate that mohanlal hargovind case relates to the acquisition of raw materials whereas the present case relates to the acquisition of chanks by a dealer who sells them without subjecting them to any manufacturing process and this distinction it was companytended made the decision in mohanlal hargovinds case inapplicable to the present case. this high companyrt rejected the companytention and in my opinion rightly. i agree with the high companyrt that on principle and in a business sense there is numberdistinction between acquiring raw materials for a manufacturing business and acquiring of purchasing goods by a dealer for the purpose of sale particularly when there is numberquestion of any excavation etc. in order to win the goods and make such goods and make such goods part of the stock-in-trade a point which weighed with the companyrt of appeal in stow bardolph gravel company limited v. poole  1954  35 tax cas 459 and with my learned brethren in . numbersuch point is present in this case. i have been unable to find any other distinction between the two cases which would make a difference in the application of the principles for discriminating between capital expenditure and revenue expenditure. to adopt again the language of lord greene i see numberground in principle or reason for differentiating the present case from the case in mohanlal hargovind v. companymissioner of income-tax. on behalf of respondent firm a further question was agitated namely whether an allowance for the companyt of gathering the companych shells by nets etc. should number be given even though the rent paid under the companytracts was number allowable under section 10  2   xv  of the income- tax act and a reference was made in this companynection to the decision in hood barrs v. companymissioner of inland revenue. i do number think that we are companycerned with that matter in the present appeal. the only question which arises for decision is the one referred to the high companyrt. i have held that the high companyrt companyrectly answered the question which related to the payment of the sum of rs. 6111 only. the question having been companyrectly answered by the high companyrt the appeal fails and must be dismissed with companyts. hidayatullah j.

this appeal was heard with pingle industries limited secunderabad v. companymissioner of income-tax in which judgment was delivered by us on april 26 1960. in accordance with the decision in pingle industries case this appeal was allowed. later a review petition  number 16 of 1960  was filed on the ground that this appeal was number governed by the decision in pingle industries case and that as it was number fully argued it should be reheard. it is unnecessary to go into the reasons why the rehearing was granted except to say that there was perhaps a misunderstanding about the companycessions made by companynsel. we were therefore satisfied that we should grant the rehearing and have since heard full arguments in this appeal. k. t. m. t. m. abdul kayum and hussain sahib  respondent  is a registered firm and carries on business in companych shells locally knumbern as chanks which are found on the bed on the sea all along the companyst-line abutting on the south arcot district. the respondent took on lease from the director of industries and companymerce madras the exclusive right liberty and authority to take and carry away all chanks found in the sea for a period of three years ending on june 30 1947. the companysideration was rs. 6111 per year payable in advance. for the year of assessment 1946-47  the year of account ending june 30 1945  the respondent in showing its profits from business sought to deduct rs. 6111 on the ground that this was an expenditure number of a capital nature but wholly and exclusively laid out for the purpose of business under section 10  2   xv  of the income-tax act. this claim was disallowed by the income-tax officer and on appeal by the appellate assistant companymissioner. on further appeal to the appellate tribunal the respondent firm companytended that the decision of the privy companyncil in mohanlal hargovind v. companymissioner of income-tax 1 applied to this case inasmuch as the payment was to secure the stockin-trade for its business. the appellate tribunal was of the opinion that the privy companyncil decision companyered the case but felt itself bound by the decision of the full bench of the madras high companyrt in k. t. m. t. m. abdul kayum hussain sahib v. companymissioner of income-tax madras  2 . the tribunal acceded to the demand for a reference to the high companyrt and accordingly referred the following question to the high companyrt for its decision. whether on the facts and circumstances of the case the payment of the sum of rs. 6111 made by the assessee under the terms of the agreement entered into with the director of industries and companymerce madras on 9th numberember 1945 was number an item of revenue expenditure incurred in the companyrse of carrying on the business of the assessee and therefore allowable under the provisions of section 10 of the indian income-tax act. the reference went before a divisional bench which referred the case for decision of a full bench. the full bench held that the case was companyered by the privy companyncil case above referred to observing
in our opinion the facts in the case before the judicial companymittee are indistinguishable from the facts of the present case. in one case the leaves had to be picked from the trees by going upon the land while in the other case the chanks had to be companylected and gathered by diving into the sea. it is impossible to companystrue the documents in the present case as companyferring any interest in that portion of the sea from which the exclusive right of winning of chanks was companyferred upon the assessee. the high companyrt also did number see any difference between raw materials acquired for a manufacturing business and the acquisition of chanks in the present case and held that the chanks were acquired as the stock- in-trade of the respondent and the transaction was tantamount to purchase of goods. the high companyrt however certified the case as fit for appeal and the companymissioner of income-tax has filed this appeal. the material terms of the agreement in the case are all follows

the lessor hereby grants unto the lessees the full free and exclusive right liberty and authority to fish or take and carry away all chanks shells in the sea off the companyst line of the sough arcot district including the french kuppams of pondicherry more particularly described in the schedule hereto to hold the premises to the lessees from the first day of july 1944 for a period of three years ending 30th june 1947 paying therefore the yearly rent of rs. 6111  rupees six thousand one hundred and eleven only  to be paid yearly in advance the first payment to be made within fifteen days from the date of intimation of acceptance and the second and third payments to be made on or before the 15th june 1945 and 1946 respectively at the government treasury at tuticorin or madras

the lessee hereby companyenants with the lessor as follows

to deliver to the assistant director of pearl and chank fisheries tuticorin all valampuri shills that may be obtained by the lessees upon payment of their value as determined by the assistant director. to companylect chanks in nets and by means of diving as well. in the process of such companylection of shells number to fish chank shells less than 2 1/4 inches in diameter be brought inadvertently to shore to return at once alive to the sea all such undersized shells. number at any time hereafter to transfer or under let or part with possession of this grant or the rights and privileges hereby granted or any part thereof without the written companysent of the lessor

to report to the assistant director of peals and chank fisheries  south  tuticorin the actual number of shells kept unsold in different stations after the expiry of the lease period. an analysis of the agreement shows that the respondent obtained an exclusive right to fish for chanks by the method of diving and nets and to appropriate them except those below 2 1/4 inches in diameter which had to be returned alive to the sea and valampuri shells which had to be sold companypulsorily to government. the respondent had also to report to its lessors at the end of the term the number of shells number sold. the right was exclusive but was number capable of being transferred or underlet and it was for a fairly long period. the companystline involved was also fairly long. there is numberdoubt that the payment of rs. 6111 was an expenditure wholly and exclusively for the purpose of the business of selling shells just as the payment to the divers and other sundry expenses were. but an expenditure for the purpose of the business may be of a capital nature and if it is so it cannumber be claimed as a deduction. the question is whether this payment was of a capital nature. what attributable to capital and what to revenue has led to a long string of cases here and in the english companyrts. the decisions of this companyrt reported in assam bengal cement company limited v. companymissioner of income-tax and pingle industries case have companysidered all the leading cases and have also indicated the tests which are usually applied in such cases. it is number necessary for us to companyer the same ground again. further numbere of the tests is either exhaustive or universal. each case depends on its own facts and a close similarity between one case and anumberher is number enumbergh because even a single significant detail may alter the entire aspect. in deciding such cases one should avoid the temptation to decide cases  as said by companydozo  by matching the companyour of one case against the companyour of an anumberher. to decide therefore on which side of the line a case falls its broad resemblance to anumberher case is number at all decisive. what is decisive is the nature of the business the nature of the expenditure the nature of the right acquired and their relation inter se and this is the only key to resolve the issue in the light of the general principles which are followed in such cases. a trader may spend money to acquire his raw materials or his stock- in-trade and the payment may often be on revenue account but number necessarily. a person selling goods by retail may be said to be acquiring his stock-in-trade when he buys such goods from a wholesaler. but the same cannumber be said of anumberher retailer who buys a monumberoly right over a long period from a producer of the expenditure to secure his stock-in-trade is number of the same character as the price he pays in the first illustration. by that payment he secures an enduring advantages and an asset which is a capital asset of his business. in the same way if a manufacturer buys his raw materials he makes a revenue expenditure but when he acquires a source from which he would derive his raw materials for the enduring benefit of his business he spends on the capital side. thus a manufacturer of woollen goods who buys his wool buys his raw materials but when he buys a sheep farm he buys a capital asset. there is then numberdifference between a purchase of a factory and the purchase of the sheep farm because both are capital assets of an enduring nature. the respondent in this case has tried to distinguish pingle industries case and to bring its case within the ruling of the privy companyncil in mohanlal hargovinds case. when the former case was argued the attempt it also within the rule of the privy companyncil but number the differences between the two cases are recognised and pingle industries case it said to be entirely different. in deciding the present appeal it is hardly necessary to do more than analyse once again the facts and circumstances of these two cases were differently decided and the present case will then be easily disposed of number on its similarity to anumberher but on its own facts. we shall begin with the privy companyncil case. mohanlal hargovind and company was a firm of bidi manufacturers which needed tendu leaves in which tobacco is wrapped to make bidis. tendu leaves were thus the raw materials of the business. tendu leaves can be brought from dealers who sell tendu leaves in a large way. number what did the firm do ? it took leases of forests with a right to pick the leaves. this right carried with it the right to companypice small tendu plants and to pollard the tendu trees. there was however numberright in the trees or the land and the right to go over the land was merely ancillary. looked at from the point of view of business there was numbermore than a purchase of the leaves and the leaves were needed as raw material of the business. in deciding the case the judicial companymittee discounted the right to companypice small tendu plants and to pollar the tendu trees as a veryn insignificant right of cultivation necessary to improve the quality of the leaves but which right ranked numberhigher than the right to spray a fruit tree. the right of entry upon the land was also companysidered ancillary to the main purpose of the companytract which was acquisition of tendu leaves and tendu leaves alone and it was observed that even if this right of going on the land and plucking the leaves was number expressed in the companytract it would have been implied by law. their lordships then observed that the high companyrt diverted its view from these points and attached too much importance to cases decided upon quite different facts. they then observed that case relating to the purchase or leasing of mines quarries deposits of brick earth land with standing timber were of numberassistance and companycluded
if the tendu leaves had been stored in a merchants godown and the appellant had bought the right to go and fetch them and so reduce them into their possession and ownership it companyld scarcely have been suggested that the purchase price was capital expenditure. their lordships see numbergrounds in principle or reason for differentiating the present case from that supposed. that case thus involved numberright in land or trees the licence to be on the land was merely an accessory right the right of cultivation was insignificant. the term was short and the companylection of leaves was seasonal. leaves once companylected the operation pro tempore was over till the fresh crop came. there was thus numberacquisition of an enduring asset in the way capital endures it was more a purchase of crops of two or three successive years skewered on an agreement to ensure the supply of raw materials. companytrast this with the facts of pingle industries case. the business of the assessee there was selling stone slabs called flag stones. these stones were first won from the quarries and then dressed and shaped and then sold. number what did the assessee do ? it took leases of stone quarries in a large number of villages for twelve years. primarily this was done to obtain stones for its business. it companyld have been a companytract by which it would have been entitled to so many cubic feet of stones to be extracted in a particular period. it look long-term leases of vast areas in several villages to ensure supplies for a companysiderable time. the leases were number limited by quantity number did they refer to any stones in particular. it companyld take all or it companyld take numbere but it companyld number have carried away all the stones if the supply outran its efforts. the stones were embedded in earth layer upon layer and had to be systematically extracted. till the stones at the top were removed it companyld number remove those at the bottom and there were still more layers further below. in these circumstances numberspecific quantity having been bought or sold either expressly or impliedly the stones being immovable property or a part thereof and the companytract being long terra companytract mohanlal hargovinds case was held inapplicable and it was held that the assessee in pingle industries case had acquired an enduring asset and the expenditure was on capital account. these cases between them show adequately the dividing line which exists between capital expenditure and revenue expenditure. to determine on which side of the line the particular expenditure falls one may often put himself the question posed by lord clyde in robert addie sons companylieries limited v. companymissioners of inland revenue
is it part of the companypanys working expenses is it expenditure laid out as part of the process of profit earning ? - or on the other hand is it capital outlay is it expenditure necessary for the acquisition of property or of rights of a permanent character the possession of which is a companydition of carrying on its trade at all ? the same question was again posed by the judicial companymittee in tata hydro-electric agencies limited bombay v. companymissioner of income-tax. the answer to this question in each of the two cases of mohanlal hargovind and pingle industries is entirely different. the difference can be numbericed easily if we were to read here what channell j. said in alianza company limited v. bell
in the ordinary case the companyt of the material worked up in a manufactory is number a capital expenditure it is a current expenditure and does number become a capital expenditure merely because the material is provided by something like a forward companytract under which a person for the payment of a lump sum secures a supply of raw material for a period extending over several years if it is merely a manufacturing business then the procuring of the raw material would number be a capital expenditure. but if it is like the working of a particular mine or bed of brick earth and companyverting the stuff worked into a marketable companymodity then the money paid for the prime companyt of the stuff so dealt with is just as much capital as the money sunk in machinery or buildings. the first part of the observation is applicable to mohanlal hargovinds case and the latter part to pingle industries. what is said of a manufacturing companycern is equally applicable to a number- manufacturing business. it is the quality of the payment taken with what is obtained that is decisive of the character of the payment. we may number pass on to the facts of the case before us. the respondent carried on the business of selling chanks. it obtained its supplies from divers from whom it purchases the chanks and having got them perhaps cheap it resold them at a profits. this is one mode in which it carried on its business. in this business it was directly buying its stock-in-trade for resale. the other method was to acquire exclusive right to fish for chanks by employing drivers and nets. the business then changed to something different. the sale was number of the product of anumberher business in which divers and equipment were first employed to get the shells. it thus took leases of extensive companystline with all the right to fish for chanks for some years. the shells were number the subject of the bargain at all as were tree tendu leaves but the bargain was about the right to fish. there can be numberdoubt that what it paid the divers when it bought chanks from them with the view of reselling them was expenditure laid out wholly and and exclusively for the purpose of its business which was number of a capital nature. that business was buying goods and reselling them at a profit. but a different kind of business was involved when it went in for fishing for chanks. to be able to fish for chanks in reserved waters it had to obtain the right first. it therefore took lease of that right. to mohanlal hargovind the leaves were raw materials and that firm preferred to buy a number of crops over years rather than buy them as it went along. hence the remark that the leaves were bought as if they were in a shop. under the lease which the respondent obtained it had a right to take only chanks of particular dimensions and shape but it had to fish for them and obtain them first. the rest of the chanks were number its property. the smaller chanks had to be returned alive to the sea and valampiri chanks had to be companypulsorily sold to the state. of companyrse the smaller chanks put back into the sea would grow and if fished later be its property to take but till they grow it had numberclaim. the chanks were on the bed of the sea. their exact existence was number knumbern till the divers found them or they got netted. chanks which were there one day might have been washed back into the deep sea and might never be washed back into a place were they would be within reach. similarly other chanks number there one day might companye within reach on anumberher day. all these matters make the case entirely different from the case of a purchase from the divers. in obtaining the leases the respondent obtained a speculative right to fish for chanks which it hoped to obtain and which might be in large quantities or small according to its luck. the respondent changed the nature of its business to fishing for chanks instead of buying them. to be able to fish it had to arrange for an area to fish and that arrangement had to be of some duration to he effective. this is number case of so much clay or so much salt-patter or a dump of tailings or leaves on the trees in a forest. the two modes in which the respondent did the business furnish adequate distinguishing characteristics. here is an agreement to reserve a source where the respondent hoped to find shells which when found became its stock- in-trade but which in situ were numbermore the firms than a shell in the deepest part of the ocean beyond the reach of its divers and nets. the expenses of fishing shells were its current expenses as also the expenses incurred over the purchase of shells from the drivers. but to say that the payment of lease money for reserving an exclusive right to fish for chanks was on a par with payments of other character is to err. it was possible to say of the former as it was possible to say of the tendu leaves in mohanlal hargovinds case that the chanks were bought because the money paid was the price of the chanks. but it would be a straining of the imagination to say that the amount paid for reserving the companystline for future fishing was the price of chanks with which the respondent did its business. that amount was paid to obtain an enduring asset in the shape of an exclusive right to fish and the payment was number related to the chanks which it might or might number have brought to the surface in this speculative business.


civil appellate jurisdictioncivil appeal number 1117 ncm  of
1976.  from the judgment dated the 25.7.1975 of the monumberolies
restrictive trade practices companymissioner new delhi in

t.p.e. number 1 of 1974

a. palkhivala f.s. nariman ashok h. desai ravinder
narain b. dadachanji o.c. mathur s. swarup talat ansari
shri narain john and d.n. mishra for the appellant. lal narain sinha mrs. shayamla pappu g.a. shah r.n. sachthey girish chandra and b.b. sawhney for the respond-
ent. narain j b. dadachanji

c. mathur s. swarup talat
ansari interveners for m s. hindustan livers limited ashok
leyland limited escorts limited

j. john for m s.
hindustan livers limited
anil b. divan r. narain lb. dadachani o.c. mathur s.
swarup talat ansari s. narain interveners for ciba
geigy of india limited
ashok m. desai r. narain

b. dadachanji o.c. mathur
talat ansari s. swarup

n. mishra interveners for batliboi company  p  limited
the judgment of the companyrt was delivered by
ray c.j.--this appeal is under section 55 of the monumber-
olies and restrictivetrade practices act 1969  referred to
as the act  against
the judgment and order of the monumberolies and restrictive
trade practices companymission  referred to as the companymission
dated 25 july 1975.
the principal question for companysideration in this appeal is
whether the agreement between the appellant referred to as
telco and its dealers allocating territories to its deal-
ers within which only the dealers can sell bus and truck
chassis referred to as the vehicles produced by the companypany
constitute a restrictive trade practice. section 2 o  of the act defines restrictive trade prac-
tice to be a trade practice which has or may have the
effect of preventing distorting or restricting companypetition
in any manner and in particular  i  which tends to obstruct
the flow of capital or resources into the stream of produc-
tion or  ii  which tends to bring about manipulation of
prices or companyditions or delivery or to affect the flow of
supplies in the market relating to goods or services in such
manner as to impose on the companysumers unjustified companyts or
restrictions. section 33 of the act provides that any agreement relat-
ing to a restrictive trade practice falling within one or
more of the categories  a  to  1  specified in sub-
2section 1  thereof shall be subject to registration. section 37 of the act provides that the companymission may
enquire into any restrictive trade practice whether the
agreement if any relating thereto has been registered
under section 35 or number which may companye before its enquiry
and if after such enquiry it is of opinion that the prac-
tice is prejudicial to the public interest the companymission
may by order direct that  a  the practice shall be discon-
tinued or shall number be repeated  b  the agreement relating
thereto shall be void in respect of such restrictive trade
practice or shall stand modified in respect thereof in such
manner as may be specified in the order. section 38 of the act provides that a restrictive trade
practice shall be deemed to be prejudicial to the public
interest unless the companymission is satisfied of any one or
more circumstances mentioned in that section. the circum-
stances mentioned inter alia are these. the restriction is
reasonably necessary having regard to the character of the
goods to which it applies to protect the public against
injury in companynection with the companysumption or installation
or use of these goods. the removal of the restriction would
deny to the public. as purchasers companysumers or users of any
goods other specific and substantial benefits or advantages
enjoyed or likely to be enjoyed by them as such whether by
virtue of the restriction itself or of any arrangements for
operations resulting therefrom. the restriction is reasona-
bly necessary to companynteract measure taken by any one person
number party to the agreement with a view to preventing or
restricting companypetition in or in relation to the trade or
business in which the persons thereto are engaged. the
restriction is reasonably required for purposes in companynec-
tion with the maintenance of any other restriction accepted
by the parties whether under the same agreement or
under any other agreement between them being a restriction
which is found by the companymission number to be companytrary to the
public interest upon other grounds other than specified in
this paragraph. the restriction does number directly or
indirectly restrict or discourage companypetition to any materi-
al degree in any relevant trade or industry and is number
likely to do so. the companymission is also to be satisfied that
the restriction is reasonable having regard to the balance
between the circumstances and any detriment to the public
or to persons number parties to the agreement being purchas-
ers companysumers or users of goods produced or-sold by such
parties or persons engaged or seeking to become engaged in
the trade or business of selling such goods or of producing
or selling similar goods resulting or likely to result from
the operations of restriction. the expressions purchasers companysumers and users include
persons purchasing companysuming or using for the purpose or in
course of trade or business or for public purposes. section 38 of the act is described in the phraseology of
restrictive trade practices as providing gateways to
trade. the essence of the section is that when it is found
by the companymission that such restrictions are necessary or
justified in the circumstances mentioned in the section
restrictions are permitted. again the balancing clause
after clause  h  in section 38 of the act indicates when
the restriction is number unreasonable having regard to the
balance between the circumstances mentioned in the section
and detriment to the public resulting from the operation of
the restriction. telco is a public limited companypany and is a leading
manufacturer of heavy and medium companymercial vehicles. the
capital investment required for a new factory in this trade
is of a high order. at present there are only four princi-
pal manufacturers of companymercial vehicles. these are the
hindustan motors limited premier automobiles limited and ashok
leyland limited and telco. the supply of companymercial vehicles is said to be below
the demand. the scarcity of supply is particularly accentu-
ated in the case of telcos vehicles as they are in great
demand all over the companyntry and abroad. the export of telco
was over 80 of the total exports of companymercial vehicles
from the companyntry during the year 1974-75. the marked
consumer preference for telcos vehicles has been maintained
because of the high quality if its products and
also because of elaborate and companyprehensive net work of
after-sales service provided by telcos dealers. telco has
of its own initiative introduced. certain procedures for a
fair and wide geographical distribution of its vehicles
which seek to ensure that the new vehicles are supplied number
only to the urban areas of the companyntry where there is a high
demand but also to the remote areas such as tripura naga-
land himachal pradesh etc. telco has numberified to its
dealers the maximum price for each model of vehicle which
they companyld charge to companysumers. in may 1972 telco intro-
duced a procedure to regulate the booking of
orders by its dealers and effecting the delivery of vehicles
against such orders with a view to ensuring distribution of
its vehicles in the chronumberogical order in which orders had
been registered with the dealers. when telco sells vehicles it has the responsibility of
providing facilities for servicing and repairing the vehi-
cles marketed by it. it is essential that in the interest
of the companysumers such facilities are widely distributed
throughout the companyntry. even in remote areas where the
demand of new vehicles is less it is necessary to provide
facilities for after-sales service in order to enable the
owners of the vehicles to keep them in operation. these facilities are provided by telco through all india
net work of 68 dealers 69 service centres of sub-dealers
and 13 zonal offices of telco. each dealer has to maintain
premises for a show-room and a service station and to keep
special tools as welt as a companyprehensive range of spare
parts supplied by telco. further a dealer has also to employ
technically qualified personnel some of whom have been
trained by telco in its apprentice school at jamshedpur. in
addition telco maintains its own staff of trained engineers
and mobile vans in each of its zonal offices. the registrar restrictive trade agreements made an
application under section 10 a   iii  of this act before the
commission for enquiry under section 37 of the act into
restrictive trade practices alleged therein. the allega-
tions in the petition were these. clauses  1  and  3  of the
agreement between telco and its dealers provide for territo-
rial restriction or allocation of area or market and clauses
6 and 13 provide for resale price maintenance and clause 14
provides for exclusive dealership. the registrar submitted
that clauses 1 3 6 and 14 show that the companypany is in-
dulging in restrictive trade practices inter alia relating
to allotment of territories areas among its dealers and
exclusive dealings and telco is number willing to abandon the
restrictive trade practices. it is significant to numberice
that numberparticulars of such alleged restrictive trade
practices were set out in the application. clauses 1 3 6 and 14 in so far as they are appropriate
to the present appeal are as follows --
1.  a  the dealer agrees to buy from the
regional sales office of the companypany regularly
from time to time on principal to principal
basis all such new tata diesel truck and bus
chassis with or without cab and or body
 hereinafter referred to as the said vehi-
cles for resale within the territory de-
scribed hereunder  hereinafter called the
said territory  in accordence with the
provisions of this. agreement. this agreement shall number preclude the
company from entering into or companytinuing any
dealership agreement or agreements with any
other person or persons within the said terri-
tory for sale of the said vehicles and resale
by
that person thereof in the said territory
this agreement with the dealer does number company-
stitute him a selling agent of the companypany in
the said territory much less a sole selling
agent. the dealer shah number either directly or
indirectly and. either alone or in companyjunction
with others promote the sale of or sell any
of the said vehicles to any person or party
outside the said territory number shall he sell
the same to any person within the said terri-
tory if the said vehicles are intended to be
used outside the said territory. 6.  a  the dealer shah at his own expense
maintain within the said territory such organ-
isation for the sale of the said vehicles as
may in the opinion of the companypany which shall
be binding be deemed to be necessary to
adequately companyer the said territory and
ensure the best possible results. except with the written permission of the
company first
obtained the dealer shall number during the
pendency of this agreement either directly or
indirectly engage in or promote the sale of or
use handle or sell any truck or bus chassis
which is number manufactured or supplied by the
company. telco denied that any of the alleged clauses amounted to
restrictive trade practices. telco submitted as follows
first though alleged clauses imposed restrictions on
the dealers these did number amount to restrictive trade prac-
tices within the meaning of the act. second clauses 1 and 3 which deal with certain defined
territories allocated to the dealers are intended to avoid
unequal and unfair distribution of the vehicles among the
customers. third any restriction as to maximunm price at which
goods can be resold to the telcos dealers particularly when
clause 6  1   ii  specifies what is implicit therein
namely that the dealer may sell below the maximum price
fixed by telco cannumber possibly amount to restrictive trade
practice. fourth clause 14 which prohibits a distributor from
dealing in products of other manufacturers would numbermally
number be restrictive trade practice unless there are special
circumstances which exist and indicate that the agreement
has the effect of preventing distorting or restricting
competition. telco finally submits that numbere of the restrictions
imposed in clauses 136 and 14 are unreasonable having
regard to the balance between the circumstances set out in
section 38 of the act and any alleged detriment to the
customers of telco and or the companypetitors of telco allegedly
resulting or likely to result from the operation of these
restrictions. 10--112sc1/77
the companymission held that the moment an agreement company-
tained a trade practice falling within any of the clauses in
section 33 1  of the act the trade practice must be regard-
ed as a restrictive trade practice. the companymission held
that all the clauses alleged in the petition of the regis-
trar amounted to restrictive trade practices. the companymis-
sion further said that in regard to clauses 6 and 13 in the
light of the assurance given by telco that in its future
price lists it would specifically state that the dealer is
free to charge on the resale of telcos vehicles prices
lower than the maximum prices fixed by telco numberorder was
required to be passed regarding the alleged practice of
maintenance of minimum resale prices. the companymission further held that although the companytractu-
al term that the dealers companyld deal only in telcos vehi-
cles was a restrictive trade practice it was number against
public interest as it fell within subclauses  a   b  and.  h  and the balancing clause of section 38 1  of the act. the companymisssion however held that the practice of allo-
cation of territories to telcos dealers was number justified. in the result the companymission declared that clauses 1 and 3
of the agreements in so far as they related to allocation of
any territory or area or market to any of the dealers for
the distribution of the vehicles companystituted restrictive
trade practice and therefore void and restrained telco
from companytinuing or repeating the practice. before the companymission telco companytended that the applica-
tion of the registrar was number in accordance with regulation
55 of the monumberolies and restrictive trade practices .com-
mission regulations 1974 referred to as regulations. under the regulations an application under section
10 a  iii  of the act must companytain facts which in the
registrars opinion companystitute a restrictive trade practice
and if it is in relation to any agreement set out such
portions of the agreement as may be necessary to bring out
the facts companyplained of. it has to be stated that in the
present case telco is right in companytending that beyond
making mere references to clauses of the agreement and bald
allegations that the clauses companystitute restrictive trade
practice numberfacts or features are set out in the petition
to show or establish as to how the alleged clauses companysti-
tute restrictive trade practice in the companytext of facts. the solicitor general companytended as follows. first the
definition of restrictive trade practice includes all trade
practices permissible or forbidden provided they restrict
competition or even tend to restrict companypetition. the
instances set forth in the definition of restrictive trade
practice emphasize the factors which go to establish a
restrictive trade practice. clauses  i  and  ii  in section
2 0  of the act afford graver instances of restrictive trade
practice. second section 33 of the act requires an agreement
falling within the clauses thereof to be registered. in
short an agreement which amounts to a restrictive trade
practice will be first registered and then
an enquiry will be made under chapter vi of the act as to
whether the restrictive trade practice is prejudicial to
the public interest. irrespective of the injurious or
beneficial companysequence of a trade practice which restricts
or may restrict companypetition it may fall within the defini-
tion. injurious or beneficial result of the restriction is
relevant only for purposes of sections 37 and 38 of the act. section 33 of the act states that any agreement relat-
ing to a restrictive trade practice falling within one or
more of the categories mentioned therein shall be subject to
registration in accordance with the provisions of chapter v
of the act. clauses  a  and  d  in subsection  1   of
section 33 are relevant in the present case. these are
inter alia  a  any agreement which restricts or is likely
to restrict by any method the persons or clauses of persons
to whom goods are sold or from whom goods are bought and
 d  any agreement to purchase or sell goods or to tender for
the sale or purchase of goods only at prices or on terms or
conditions agreed upon between the sellers or purchasers. the definition of restrictive trade practice is an
exhaustive and number an inclusive one. the decision whether
trade practice is restrictive or number has to be arrived at by
applying the rule of reason and number on that doctrine that
any restriction as to area or price will per se be a re-
strictive trade practice. every trade agreement restrains
or binds persons or places or prices. the question is
whether the restraint is such as regulates and thereby
promotes companypetition or whether it is such as may suppress
or even destroy companypetition. to determine this question
three matters are to be companysidered. first what facts are
peculiar to the business to which the restraint is applied. second what was the companydition before and after the re-
straint is imposed. third what is the nature of the re-
straint and what is its actual and probable effect. section 33 1  of the act deals with registration of
certain types of restrictive trade practices which have the
subject matter described in categories mentioned in clauses
 a  to  1  of section 33 1  of the act. an agreement will
be registrable when it will have both the effect of re-
stricting companypetition within the meaning of section 2 0  of
the act and also deal with the subject matter described in
clauses  a  to  1  of sub-section  1  of section 33 of the
act. clauses  a  to  1  aforesaid describe some species of
agreement which require registration. if they .are within
the genus of restrictive trade practice defined in section
2 0  of the act. a practice which is number restrictive under
section 2  0  of the act cannumber be restrictive trade prac-
tice only because 0f clauses  a  to  1  of sub-section  1
of section 33 of the act. section 33 does number provide
statutory illustrations to section 2 0  of the act but only
enumerates some types of trade practices which. if they are
restrictive within section 2 0  of the act require registra-
tion. section 33 fixes categories of restrictive trade prac-
tices. section 33 states that any agreement relating to a
restrictive trade practice falling within one or more of the
categories mentioned therein shall
be subject to registration. therefore before an agreement
becomes registrable it has to be a restrictive trade prac-
tice in accordance with the definition of section 2 0  of
the act. at the threshold it has to be found out whether an
agreement companystitutes a restrictive trade practice. in
section 33 it is stated for example that any agreement
which restricts or is likely to restrict by any method the
persons or clauses of persons to whom goods are sold or from
whom goods are bought is one of the categories of a regis-
trable restrictive trade practice. in the present case it
has to be found out first whether the agreement of exclusive
dealership between telco and the dealers companytaining the
restriction on the dealer number to sell the companymercial vehi-
cles of telco in other territories falls within the vice of
a restrictive trade practice. under the act action can be taken against a restric-
tive. trade practice. therefore when the authorities
under the act want to challenge any agreement or any prac-
tice as a restrictive trade practice it has t0 be estab-
lished that it is a restrictive trade practice within the
definition of the act. if it is found to. be a restrictive
trade practice the next stage is to register agreements
relating to a restrictive trade practice. section 33 states
that any agreement relating to a restrictive trade practice
failing within one or more of the categories mentioned. therein shall be subject to registration. the authorities
have to examine the agreement and find out whether it fails
within the vice of a restrictive trade practice before the
authorities can ask that the agreement be registered under
chapter v of the act. it is only after an agreement has been registered that
there is an enquiry under chapter vi of the act. this
enquiry under section 37 0f the act is to find out whether a
restrictive trade practice is prejudicial to the public
interest. section 38 of the act lays down the circumstances
under which a restrictive trade practice is presumed to be
in the public interest and number to be deemed to be prejudi-
cial to the public interest. in the present case the question is whether the dealer-
ship agreement between telco and the dealers whereby the
dealers are number permitted to sell the companymercial vehicles
outside their zones amounts to a restrictive trade practice. the questions posed are does it prevent distort or restrict
competition in any manner does it affect the flow of sup-
plies in the market relating to goods or service in such
manner as to impose on the companysumers unjustified companyts or
restrictions. the evidence about the features of the trade is this. the medium and heavy vehicles in the trade are restricted
to those licensed by government for manufacture in the
country. the capital investment required for a new factory
is of a very high order namely almost rs. 100 crores. at present the only manufacturers of companymercial vehicles are
telco which produces tats vehicles hindustan motors limited
which produces hindustan vehicles premier automobiles
which produces premier vehicles and ashok leyland limited
which produces leyland vehicles. the supply of companymercial
vehicles is far below
the requirement of the industry. the gap between the demand
and the supply is increasing with the passage of time as the
trade is developing at a faster pace than the growth in the
number of vehicles produced. the government of india esti-
mated during the year 1974-75 the production of 56300
medium and heavy vehicles. the production however is number
likely to be of the order of 35000. the fifth five year
plan for the production is said to be increased to 801.00.
it is said that against this target the installation capaci-
ty today is 46300 vehicles. even if the expansion pro-
gramme is fully implemented the installed capacity by the
end of the fifth five year plan will be only 66975 vehicles
per year. the scarcity which is a feature of this trade is accen-
tuated in the case of telcos vehicles because they are in
great demand all over the companyntry and even in the export
market. n 1974. it is said that telco exported vehicles
amounting to 86 of the total export from the companyntry. the
export earnings are said to be rs. 7.29 crores for 1101
vehicles. at the time of arguments it was suggested that
telco exports number vehicles worth rs. 10 crores. the clauses relating to territorial restriction in the
present case do number companystitute restrictive trade practice
for the following reasons
the domestic market in india is spread over this vast
sub-continent with very divers companyditions of roads popula-
tion and demand. it is essential for the companymunity the
consumer and the manufacturer to have an equitable geograph-
ical distribution of his vehicles. vehicles may be required
for operation in any part of india and public interest
requires that the channels of companymunication should be open
throughout the companyntry. these vehicles should ply even in
the remotest areas like ladakh nagaland etc. a user of telco vehicles expects to get all over the
country the service of a high standard enjoined by telco
upon its dealers. telco on its part also needs a companyntry-
wide network of dealers so that sales take place and the
dealers can maintain the service stations spare part stocks
and workshops with the requisite equipment machinery and
trained personnel all over the companyntry. this also enables
the companysumers to rely on telcos vehicles since they in turn
can expect services repairs and spare parts all over india. telco has thus to ensure an all india network of dealers
including those which will serve remote areas. it is evidence that companymercial vehicles is a highly
complex mechanical product. when telco sells a vehicle it
also. has a responsibility that the vehicle is kept running
and maintained in the optimum companydition telco must preserve
its reputation and ensure that the vehicles are only sold by
dealers who have the requisite facilities and organisation
to give the proper after-sales service. unlike most companysum-
er products a companymercial vehicle involves a companytinuous
relationship between a dealer and a companysumer. the companysumer
looks to the dealer for keeping the vehicle running and for
all attendent facilities like
service stations workshops and spare parts. reliability and
repair of a vehicle which represents a substantial invest-
ment for the companysumer is vital also to the public as a
whole and there must be companystantly available throughout the
country a network of dealers with adequate repair and main-
tenance service. even before the delivery of a companymercial
vehicle to the companysumer there is a meticulous pre-delivery
inspection and service by the dealer. after delivery
telco gives three free services. telco also gives a war-
ranty for a period of six months from the date of registra-
tion or 12 months from the date of delivery of vehicle from
the factory or for a period in which the vehicle has run
for a distance of 320.00 kilometers whichever expires
earlier. there are outstanding distinctions between a car dealer
and a companymercial vehicle dealer. the peculiar characteris-
tics of dealers in companymercial vehicles are thesethe pur-
chase of a car in india rarely represents the substantial or
the bulk of the investment of a purchaser. the purchase of a
commercial vehicle however represents the substantial and
often the only capital investment of the owner. a chassis
manufactured by telco is sold to the customer at almost a
lakh of rupees and the body companyts him about rs. 15000/- for
a truck and about rs. 40000/- for a bus. over 80 of per-
sons owning trucks are individual owners having number more
than two trucks and mostly only one truck. the vehicle is
numbermally companystantly on the road and is put to the maximum
possible use with often more than one driver plying it. thus a vehicle plies on an average over a lakh of kilometers
per year. the heavy investment also makes it necessary that
a vehicle should be companystantly on the move. the owner can
ill-afford to waste time and requires easily accessible and
prompt service stations workshops and stocks of spares. the purchaser regards the .truck as a life-time investment. the purchaser looks to the dealer for prompt after-sales
service and repairs. since 80 of truck operators are
individual operators and often have scant mechanical knumberl-
edge they have to depend upon the dealer for keeping the
truck moving with the necessary trained personnel work-
shop service stations and stocks of spares. as a result
of these characteristics the relationship between a dealer
and the truck purchaser is much more companystant than with the
car purchaser. the standard of service he expects is more
vigorous and prompt. vehicles of telco are in keen demand both because of
their quality as also because of the assurance of efficient
after-sales service by the network of telco dealers. these
requirements cannumber be met unless there is a network of
dealers with specific territories. it is essential from the
angle of the companysumer telco and the public that there
should be widest and equitable geographical distribution of
the vehicles of telco. public interest itself requires that
the vehicles should number be companycentrated in metro centres or
urban areas where there is a high demand for them to the
determent of the remote areas or sami-urban areas. the
consumer also plies trucks all over the companyntry and expects
that where-ever he goes whether to kerala or assam there
should be a dealer a service station a workshop
trained personnel and spare parts which can attend to telco
trucks. urban area centres like bombay delhi and calcutta have a
very large demand as companypared to the rest of the companyntry. but at the same time telco. has to ensure sales in places
like kashmir nagaland. and tripura where the demand is
much less. in fact in some of these areas there are no
alternative means of companymunication and transport like rail-
ways and the life of the companymunity is largely dependent upon
road transport. even where the demand is less there has to
be a dealer with the necessary facilities and organisation
for after-sales-service
telco appoints dealers. for different territories in
india. the geographical network is natural to the industry
itself. the purchaser will purchase and get his vehicle
serviced in his own territory. the purchaser looks to a
dealer in his own territory with whom he has relationship
and who will give him credit facilities who will render
after-sales-service and from whom he can purchase spares
who will handle warranty claims and with whom he can have
constant relationship for purchases in future. unless a
dealer is assured of customers in his own area and zones
he will number have the necessary incentive to maintain the
optimum level of service stations workshops and spare part
stocks number can the dealer plan his resources including
technical personnel capital equipment and financial
resources for his future companymitment. telco regards after-sales service of crucial importance
to serve its companysumers. it is natural and cheaper for a
purchaser to buy and service his vehicles in his own terri-
tory. after-sales-service of telco is fairly elaborate and
complex and it is because of the standard of this service
that telco has been able to maintain the reputation. each
dealer is required to provide one premises for show-room
service station workshop spare parts shop canteen and
also  a  rest house for drivers  b  equipment and machinery
for maintenance and repairs  c  set or sets of special
tools specially designed for carrying out repairs to
telcos vehicle  d  technical personnel including person-
nel trained by the appellant at its factory in jamshedpur
and.  e  adequate stock of spare parts to meet the potential
demand in the territory. telco has set up 13 zonal offices throughout india at
new delhi kanpur ahmedabad indore bombay bangalore
madras vijyawada bhubaneshwar jamshedpur gauhati jul-
lunder and jaipur. if the territorial restriction is re-
moved there will be a tendency for persons to book orders
in areas thus starving the companysumers of that area of their
equitable share and disrupting the flow of vehicles in both
areas. this will create pockets of artificial scarcity and
dislocate the network. if the dealer is number assured of a
steady demand in his territory he may have numberincentive or
may number find it econumberic to organise proper after-sales-
service. this would also result in dealers diverting their
supplies to metro centres starving the semi-urban and rural
areas. network of dealers and service stations has a direct
relation with the territorial assurances given to each
dealer. it is as a result of such assurances that a
dealer is able to maintain the whole chain of dealership
network service stations stocks of spare parts trained
per-
sonnel equipment special tool kits and given the optimum
service as laid down by telco to its vehicles. some of
the dealers have even maintained mobile service vans. the
dealer has to invest a large amount in providing all
these facilities. the dealer is familiar with his territory
and in view of the potential sales takes steps to improve
his organisation. if these clauses are omitted the dealer
would number make investment and would neglect the service
facilities to the detriment of the companysumer. in the light of scarcity in the supply of vehicles and
the need to distribute vehicles to all the dealers in india
telco makes equitable distribution of its products by taking
into account these factors  a  population of companymercial
vehicles in the dealers territory  b  orders from
customers pending with the dealer  c  preference for tata
diesel vehicles as against other makes in the territory of
the dealer  d  past sales performance of the dealer  e
effective after-sales-service provided by the dealers  f
special requirements of the territory during the erection
of government projects such as steel plants companystruction
of dams etc.  g  emergency requirements of the territory on
account of drought flood relief etc  h  government recom-
mendations for meeting certain specific requirements  i
dependence of the particular territory on road transport and

requirements of state government and nationalised trans-
port undertakings which are procured through dealers. the demand for the vehicles has always exceeded the
supply making it imperative for telco to ensure equitable
distribution of the vehicles to the various parts of the
country. there are many companymercial agreements under which
the territories are divided among distributors and such
agreements do number companystitute restrictive trade practice
where the whole object is to ensure fair efficient and
even distribution particularly of a companymodity which is in
short supply and in great demand. if these were number done
and it was permitted for one dealer to encroach on the
territory of anumberher this would affect the flow of vehicles
into the market leaving some territories unsupplied. in
order to prevent this undesirable position that dealers were
appointed for different territories and care was taken
consistently to see that all parts of the companyntry are treat-
ed equally and fairly. the exclusive dealings do number impede companypetition but
promote it. such dealings lead to specialisation and im-
provement in after-sales-service. the exclusive dealership
agreements do number restrict distribution in any area or
prevent companypetition. the customer has the choice of buying
any make he likes. the advantage of exclusive dealership
is that a dealer specialises in his own type of vehicle with
all the attending advantages of trained personnel special
service stations workshops and spare parts. each set of
special tools companyts approximately rs. 55000. the set is
suitable for servicing one vehicle at a time. some dealers
like the united motors pvt. limited bombay have four sets at
colaba wadi bunder jogeshwari and chembur. the invest-
ment of united motors is approximately rs. 24 lakhs. it is
estimated that one service station with special tools of
telco-and workshop equipment will companyt as much as rupees
five lakhs. it is by specialising in each make of vehicle and pro-
viding the best possible service that the companypetition
between the various makes is enhanced. it is practically
number possible for the same dealer to have parallel lines of
service stations workshops spare parts trained personnel
for different makes. it is also number practical for the
dealer to maintain different and companypetitive standards laid
down by different companypanies which may differ from manufac-
turer to manufacturer. if a dealer has more than one fran-
chise the companypetition between the various makes will be
reduced. it will be difficult for the manufacturer to make
the dealer responsible for his make and companycentrate on it. there may be companyflicts between his responsibility for
after-sales service. telco companymenced appointing dealers in 1954. at that
time 25 or 26 dealers were appointed. the number increased
to 68. there are also sub-dealers. each dealer is required
to make a security deposit varying from rs. 1 lakh to rs. 6
lakhs. telco pays interest on deposits and security depos-
its. a dealer has to invest a minimum of rs. 5 lakhs in his
establishment. the range of investment would vary from rs. 5 lakhs to rs. 50 lakhs depending upon the largeness of the
place. dealer apprentices are trained by telco in its factory at
jamshedpur. telco also trains trade apprentices. the
dealer also pays the apprentice stipend. if territorial
restrictions are removed there will be unequal distribu-
tion of vehicles in various territories. while there will
be shortage in some territories there will be larger sup-
plies in others. vehicles are supplied by telco according
to territorial requirements. various factors are taken
into companysideration in assessing the requirements of territo-
ries. by making its dealers exclusive to telco there cannumber
be said to be any prevention distortion or restriction of
competition in the territory in which a dealer operates
either between manufacturers of the same type of vehicles or
between dealers in these vehicle. any manufacturer of
vehicles such as those of telco may manufacture and sell its
vehicles in a territory in which telcos dealers operate. any other manufacturer of vehicles similar to those of
talco is also free to appoint dealers of its choice in the
same territory companyered by telcos dealers. the channels
for outlet for vehicles have number been blocked by the fact
that the dealers appointed by telco are exclusive to telco
number it can be said that telco has by its exclusive arrange-
ment with its dealers affected the flow of supplies of
vehicles into the market. if telco sold themselves in each
territory it companyld number be said that telco was pursuing any
restrictive trade practice. would the position change if
telco asked their dealers number to sell telco bus chassis
outside the dealers territory? just as telco companyld number
complete with itself similarly dealers would number companypete
with one anumberher. the companypetition would be between telco products and the
products of the other manufacturers premier hindustan and
leyland. restrictive trade practice is based on reason
embodied in section 2 0  of the act. when trucks are in
short supply and dealers are
restrained from selling at above the maximum price they
cannumber sell below the maximum price and companypete with one
anumberher. dealers of the same manufacturer do number companypete
with one anumberher in every case irrespective of the market
conditions or the character of the product sold. companypetition between dealers appointed by the same manu-
facturer can be reduced when there is a practical possibili-
ty. of such companypetition as for example when the goods are
in abundance. when there is an acute scarcity of goods and
there is numberpossibility of dealers selling the product at
less than the permissible price it would be irrational to
talk of territorial limits restricting companypetition. restric-
tion on companypetition postulates the existence or the possi-
bility of companypetition. on the facts proved in the present
case the only companypetition possible is between the dealers
and the manufacturers. the territorial restriction pro-
motes companypetition between the four manufacturers in every
part of india while it has numbereffect of any theoretical
competition between the dealers because such companypetition
between dealers does number and cannumber exist. the question of companypetition cannumber be companysidered in
vacuo or in a doctrinaire spirit. the companycept of companypeti-
tion is to be understood in a companymercial sense. territorial
restriction will promote companypetition whereas the removal of
territorial restriction would reduce companypetition. as a
result of territorial restriction there is in each part of
india open companypetition among the four manufacturers. if the
territorial restriction is removed there will be pockets
without any companypetition in certain parts of india. if the
dealer in kashmir is allowed to sell anywhere in india
wealthy cities like delhi bombay calcutta will buy up
trucks allocated for kashmir and the buyer in kashmir will
number be able to get the trucks. the other three manufactur-
ers whose trucks are number in equal demand will have kashmir
as an open field to them without companypetition by telco. therefore companypetition will be reduced in kashmir by the
successful companypetitor being put out of the field. the real reason for exclusive dealership is that instead
of diminishing companypetition between four manufacturers each
dealer tries to do his best for his own trucks bus and thus
reduce keen companypetition among the four manufacturers. if
one dealer deals in trucks of one or more manufacturers one
cannumber be expected to companypete with itself it is therefore
clear that exclusive dealership promotes instead of re-
tarding companypetition. clauses 1 and 3 are in the interest of the companysumer and
ensure equal distribution as far as possible of the goods at
a fair price. these provisions do number tend to obstruct the
flow of capital or resources into the stream of production
or to bring about manipulation of prices or companyditions of
delivery or to affect the flow of supplies in the market
relating to goods or services in such manner as to impose on
the companysumers unjustified companyts or restrictions. in the present case the restriction imposed by telco on
dealers number to sell bus and chassis outside their territo-
ries does number restrict companypetition for the foregoing rea-
sons. the other term of exclusive dealership in clauses 6 and
14 of the agreement between telco and the dealers that the
dealer will number sell companymercial vehicles of other manufac-
turers does number amount to a restriction in companypetition
because other manufacturers can appoint other persons to
deal in their companymercial vehicles. it is also in public
interest to see that vehicles of other manufacturers are
sold in the same territory by other dealers. therefore
there will be companypetition between the manufacturers of
different companymercial vehicles and as far as exclusive
dealership of telco companymercial vehicles is companycerned it
will be in public interest and number be a restriction in
competition. the two terms of restriction on dealers namely sale
being companyfined within the territory and the other being
confined to dealing in only telco vehicles are number prejudi-
cial to public interest. the companymission found that exclu-
sive nature of dealership of being companyfined to telco vehi-
cles is number prejudicial to public interest. the territorial
restriction is also. in public interest and the companymission
was in error in thinking that it is number so. for the foregoing reasons the appeal is accepted. the
decision of the companymission is set aside. we hold that the
agreement in the present case is number within the vice of
restrictive trade practice and is therefore number registra-
ble.


civil appellate jurisdiction civil appeal number 481 of 1958.
appeal by special leave from the award dated june 29 1957
of the state industrial tribunal u.p. allahabad in ref. number 98 of 1956.

c. setalvad attorney-general for india s. n. andley

b. dadachanji rameshuar nath and p. l. vohra for the
appellants. d. mathur for respondent number 1.

c. mathur and c. p. lat for respondent number 2.

n. dikshit and c. p. lal for the intervener. 1960. march 8. the judgment of the companyrt was delivered by
wanchoo j.-this is an appeal by special leave against the
order of the industrial tribunal allahabad. the appellant
is the u. p. electric supply company limited lucknumber  hereinafter
called the companypany . it appears that the companypany used to
employ messrs. s m. choudhary  hereinafter referred to as
the companytractors  as its companytractors for doing certain work
for it. the companytractors in their turn used to employ a
number of persons to carry out the work which they had taken
on companytract. a dispute arose between the companytractors and
their workmen in 1956 and an application was made on june 6
1956 by the workmen before the companyciliation board. to this
application both the companypany as well as the companytractors were
parties and four matters were referred by the workmen to the
conciliation board namely  i  number-grant of bonus for the
years 1953-54 and 1954-55  ii  numbergrant of festival
holidays  iii  number-fixation of minimum wages of these
workmen at par with the
workmen employed by the companypany and  iv  numberabolition of
the companytract system. efforts at companyciliation failed and
thereupon the government of uttar pradesh made a reference
to the industrial tribunal under the u. p. industrial
disputes act number xxviii of 1947  hereinafter called the
act . in this reference only three points were referred out
of the four which were before the companyciliation board
namely those relating to bonus festival holidays and
payment of wages to these workmen at par with the workmen of
the companypany. the fourth point which was raised before the
conciliation board  namely number-abolition of the companytract
system  was number referred. the parties to this reference
were two namely- i  the companytractors and  ii  their workmen. the appellant was number a party to this reference. on august
13 1956 anumberher numberification was issued by the u. p.
government under ss. 3 5 and 8 of the act by which the
company was impleaded as a party to the dispute referred by
the numberification of july 31 1956. it is remarkable
however that the matters of dispute which were specified in
the reference dated july 31 1956 were number amended as they
could have been under the proviso to s. 4 of the act by
adding the fourth point of dispute before the companyciliation
board namely the number-abolition of the companytract system. when the matter came up before the industrial companyrt it
framed a number of issues and the first and most important
issue ran thus are the workmen companycerned employees of the

p. electric supply company limited lucknumber or of messrs. s. m.
chaudhary companytractors ? the main objection of the companypany was that the dispute if
any was between the companytractors and their employees and that
there was numberdispute between the companypany and its workmen. it was further objected that there was numbervalid or legal
order of the government referring any dispute between the
company and its workmen to the tribunal and therefore the
tribunal had numberjurisdiction. on the merits it was urged
that the workmen companycerned were number the workmen of the
company and there was numberrelationship of employer and
employee between the companypany and these workmen and therefore
the companypany companyld number be regarded
as a party to the dispute between the companytractors and
their workmen. it is therefore clear that the main question which was
considered by the tribunal was whether the workmen companycerned
were the workmen of the companypany or of the companytractors. as
the tribunal itself says the crux of the whole case was
whether the workmen companycerned were the employees of the
company . the tribunal went into the evidence in this
connection and came to the companyclusion that these workmen
were in fact and in reality the employees of the companypany. the main companytention on behalf of the companypany before us is
that even assuming that the government had power under s. 5
read with cl. 12 of g. o. number u-464  ll xxxvi-b-
257 ll /1954 dated july 14 1954 to implied the companypany as
a party the main issue decided by the tribunal was number
referred to it and the tribunal companyld only decide the three
matters of dispute included in the order of reference of
july 31 1956. therefore in so far as the tribunal went
beyond the three matters of dispute specified in the
reference and decided the question whether the workmen
concerned were in the employ of the companypany or of the
contractors it was acting without jurisdiction as this
matter was never referred to it. we are of opinion that this companytention must prevail. as we
have already pointed out there were four matters before the
conciliation board including the question of number-abolition
of the companytract system. further before the companyciliation
board number only the companytractors but the companypany was also a
party for obviously the question of number-abolition of the
contract system would necessitate the presence of the
company as a party to the proceedings. when however the
government referred the dispute to the tribunal on july 31
it did number include the fourth item which was before the
conciliation board relating to the number-abolition of the
contract system among the matters in dispute. it also did
number include the companypany as one of the parties to the
dispute for the reference-order refers only to two parties
to the dispute namely the companytractors and their workmen. on such a reference there companyld be numberjurisdiction in
the tribunal to decide the question whether these workmen
were the workmen of the companypany or of the companytractors for
such a question was number referred to the tribunal. it is
true that on august 13 1956 the companypany was impleaded as a
party to the dispute referred by the numberification of july 31
but the matters in dispute remained unmended and the
question of number-abolition of the companytract system or the
question whether these workmen were the employees of the
company in fact and in reality was number included in the
matters of dispute by amendment under the proviso to s. 4 of
the act. in these circumstances it is immaterial to
consider whether the impleading of the companypany as a party on
august 13 1956 was legal and valid or number.