civil appellate jurisdiction civil appeal number. 1219-
20 nm  of 1987.
from the judgment and order dated 17.3. 1987 of the
customs excise gold  companytrol  appellate tribunal new
delhi in appeal number cd bom 398 399 of 1984.

s. ganesh for the appellants. the judgment of the companyrt was delivered by
sabyasachi mukharji j. these two appeals are under
section 130e b  of the customs act 1962  hereinafter called
the act  from the orders passed by the customs excise
gold  companytrol  appellate tribunal  hereinafter called the
cegat . the questions involved in these two appeals are
identical. the appellants claim to be the citizens of india
is number disputed. at the material time in 1983 they were
based in hong kong and singapore respectively. in february 1993 when the appellants came to india
they were charged with alleged offences under sections 112
and 114 of the act and also simultaneously with the alleged
offences under the foreign exchange regulation act 1973
 hereinafter called the fera .the enforcement authorities
recorded under section 40 of the fera the appellants
statements at the time of their arrest. it is alleged that
these statements were obtained under duress and by using
third degree methods against them who soon thereafter
retracted their statements. numberstatements were however. recorded by the customs authorities under the companyresponding
section 108 of the act. in the fera proceedings. the
enforcement directorate it is stated applied that there
was numberevidence against the appellant-vijay prakash mehta
and the directorate had numberobjection to his discharge. accordingly by an order dated 29.10.1985 of the
additional chief metropolitan magistrate 8th companyrt
esplanade bombay has was discharged and his bailbond was
cancelled. so far as the appellant j.d. mehta is companycerned he had
replied to the show-cause numberice issued by the enforcement
directorate and the mater is pending adjudication. in the
meantime the proceedings under sections 111 to 114 118 of
the act resulted in the order dated 19.1.1984 of the addl. companylector of customs  preventive  bombay whereby he imposed
a penalty of rs. 300000 on each of the appellants. it may
be mentioned that each of the appellants was alleged to have
pg number437
been caught red-handed with the foreign exchange to the tune
of rs. 1190648. the appellants had admitted their part in
the systematic illegal export of foreign exchange from india
during the past several years. against the said order dated
19.1. 1984 the appellants preferred their respective
appeals to the appellate tribunal under section 129a of the
act. the tribunal reduced the amount of penalty to be
deposited in an application made under section 129e of the
act. pending hearing of the appeal to rs. 1 lakh for each
of the appellants. it is alleged that since neither of the appellants were
in any financial position to deposit even rs. 1 lakh they
sought further reduction. the appellate tribunal after
considering the facts and circumstances of the case and
taking into companysideration all the relevant material facts
and factors by its order dated 17th february 1987
declined to do so and dismissed the appeals for number-
compliance with the provisions of section 129e of the act. aggrieved thereby the appellants have appealed to this
court. section 129e of the act provides as follows. where in any appeal under this chapter the decision or
order appealed against relates to any duty demanded in
respect of goods which are number under the companytrol of the
customs authorities or any penalty levied under this act. the person desirous of appealing against such decision or
order shall pending-the appeal deposit with the proper
officer the duty demanded or the penalty levied
provided that where in any particular case. the
collector  appeals  or the appellate tribunal is of opinion
that the deposit of duty demanded or penalty levied would
cause undue hardship to such person the companylector  appeals
or as the case may be the appellate tribunal may dispense
with such deposit subject to such companyditions as he or it may
deem fit to impose so as to safeguard the interests of
revenue. the aforesaid section provides a companyditional right of
appeal in respect of an appeal against the duty demanded or
penalty levied. although the section does number expressly
provide for rejection of the appeal for number-deposit of duty
or penalty yet it makes it obligatory on the appellant to
deposit the duty or penalty pending the appeal failing
which the appellate tribunal is fully companypetent to reject
the appeal. see in this companynection the observations of
this companyrt in respect of section 129 prior to substitution
pg number438
of chapter xv by the finance act 1980 in navin chandra
chhotelal v. central board of excise customs ors. 1971 3 scr 357. the proviso howevergives power to the
appellate authority to dispense with such deposit
unconditionally or subject to such companyditions in cases of
undue hardships. it is a matter of judicial discretion of
the appellate authority. the case of the appellants was that they had number gone
out of india and had numberassets in india. their passports
were impounded at the time of arrest. their visa had lapsed
and companyld number be renewed. they had numbermoney hence the
right of appeal companyld be illusory unless they are permitted
to deposit only rs.60000 each which they companytend they are
able to procure with the assistance of their father. in the impugned order the tribunal numbered the several
abortive and defective attempts made to get extension of
time to deposit the security. firstly. the prayer was to
accept the deposit of rs.35000 and secondly to accept the
deposit of rs.60000 in 2 months. the tribunal took into
account the probability of the prima facie case of the
appellants. the appeals were filed two years ago. after
taking into companysideration these factors the tribunal
rejected the prayer for reduction. it was companytended that
this was wrong shri m. s. ganesh. learned advocate for the
petitioners. pleaded that in a situation of this type the
condition for deposit of penalty was bad as it whittled down
the appellants right of appeal. this in our opinion is
incorrect shri ganesh tried to companytend that the right of
appeal is being whittled down by the procedure followed in
this case he drew our attention to certain observations of
this companyrt in hoosein kasam dada  india  limited v. the state
of madhya pradesh ors. 1953 scr 987. there this companyrt
held that when the right to appeal vests change of law
after initiation of proceedings in lower companyrt would number
divest the vested rights of the appellant. the right of
appeal is a matter of substantive right and number merely a
matter of procedure and this right becomes vested in a
party when the proceedings are first initiated in and
before a decision is given by the inferior companyrt and such a
right cannumber be taken away except by express enactment or
necessary intendment. the aforesaid observations in our opinion. have no
application to the instant case. here the right that was
granted w as a right held with a companydition. there was o
question of change of that right. in the instant case the
only substantive right is the right of appeal as
contemplated under sections 129a and 129e of the act and
that right is a companyditional one and the legislature in its
wisdom has imposed that companydition. numberquestion of whittling
pg number439
down that right by an alteration of procedure arises in
this case. right to appeal is neither an absolute right number an
ingredient of natural justice the principles of which must
be followed in all judicial and quasi-judicial
adjudications. the right to appeal is a statutory right and
it can be circumscribed by the companyditions in the grant. companynsel referred us to the decision of this companyrt in
collector of customs excise companyhin ors. v. a.s. bava
l968 1 scr 82. there this companyrt found that section 35 of
the central excises salt act 1944  excises act  gave a
right to appeal. under section 12 of the act the central
government was authorised to apply to appeals under the
excises act the provisions of the sea customs act 1878
dealing with the procedure relating to appeals. in exercise
of that power the provisions of section 129 of the act were
made applicable to appeals under the excises act. the
section required an appellant to deposit pending the
appeal the duty or penalty imposed and empowered the
appellate authority in his discretion to dispense with
such deposit pending the appeal in any particular case. the
respondent therein filed an appeal against the duty imposed
on him under the excises act and prayed for dispensation of
the deposit. the companylector who was the appellate authority
rejected the prayer and when numberdeposit was made within the
time fixed dismissed the appeal. the respondent filed a
petition in the high companyrt which was allowed and the
collector was directed to hear the appeal on merits. this
court held that section 35 of the excises act gave a right
of appeal and section 129 of the act whittled down that
substantive right and as such section 129 companyld number be
regarded as procedure relating to appeals within section
12 of the excises act. these observations cannumber be applied to the facts of
this case. here we are companycerned with the right given under
section 129 a of the act as companytrolled by section 129e of
the act and that right is with a companydition and thus a
conditional right. the petitioner in this case has no
absolute right of stay. he companyld obtain stay of realisation
of tax levied or penalty imposed in an appeal subject to the
limitation of section 129e. the proviso gives a discretion
to the authority to dispense with the obligation to deposit
in case of undue hardships. that discretion must be
exercised on relevant materials honestly bona fide and
objectively. once that position is established it cannumber be
contended that there was any improper exercise of the
jurisdiction by the appellate authority. in this case it is
manifest that the order of the tribunal was passed honestly
pg number440
bona fide and having regard to the plea of undue hardship
as canvassed by the appellant. there was numbererror of
jurisdiction or misdirection. though in a different companytext the public policy involved
in number granting interim stay has been explained by this
court in asstt. companylector of central excise west bengal v.
dunlop india limited 1985 19 elt 22.
it is number the law that adjudication by itself following
the rules of natural justice would be violative of any
right- companystitutional or statutory without any right of
appeal as such. if the statute gives a right to appeal upon
certain companyditions it is upon fulfilment of those
conditions that the right becomes vested and exercisable to
the appellant. the proviso to section l29e of the act gives
a discretion to the tribunal in cases of undue hardships to
condone the obligation to deposit or to reduce. it is a
discretion vested in an obligation to act judicially and
properly. in the facts and circumstances of the case and all the
relevant factors namely the probability of the prima facie
case of the appellants the companyduct of the parties have
been taken into companysideration by the tribunal.


civil appellate jurisdiction civil appeal number 6 of 1965.
appeal by special leave from the judgment and order dated
may 1 1962 of the allahabad high companyrt in civil misc. writ
number 2892 of 1960.
gopinath kunzru d. d. verma s. s. khanduja and ganpat rai
for the appellant. l. misra advocate-general uttar pradesh c b.
agarwala atiqur rehman and o. p. rana for the respondents. shah j. the appellant--a society registered under the
societies registration act 21 of 1860 companyducts an
educational institution styled dwarka prasad girls
intermediate companylege at allahabad. management of the
affairs of the society is entrusted by the memorandum of
association to an executive companymittee companysisting of six
office-bearers seven members elected at the general meeting
of the society and two numberinees of the settlors of certain
buildings in which the companylege is companyducted and it is
provided by the memorandum that numberone who is number a member
of the society can become or remain an office-bearer or
member of the executive companymittee. under the intermediate education act  u.p. act 2 of 1921
provision was made for establishing a board with power to
prescribe companyrses of instruction for the intermediate
classes and the higher sections of english schools to grant
diplomas or certificates
to companyduct examinations at the end of the high school and
intermediate companyrses to recognize institutions for purposes
of its examinations and to do all such other acts and
things as may be requisite in order to further the objects
of the board. this act was amended by the u.p. act 35 of
1958. by s. 7 of the amending act which came into force on
january 23 1959 ss. 16a to 161 were incorporated into u.p. act 2 of 1921. by s. 8 the state government was authorised
to promulgate regulations in respect of matters companyered by
ss. 16a to 161.
by letter dated september 12 1960 the regional inspector of
girls schools iiird region allahabad called upon the
society to submit and get approved a scheme of
administration of the institution managed by it. the
society thereupon presented a petition under art. 226 of the
constitution in the high companyrt of judicature at allahabad
for the issue of a writ quashing the orders passed by the
regional inspector of girls schools and requiring the state
of u.p. the director of education the regional inspector
of girls schools and the board of high school and inter-
medicate education who were respectively respondents number. 1 to 4 number to enforce the provisions of ss. 16a to 161 as
originally enacted or as modified by the removal of
difficulties orders issued under s.9 of the amending
act. it was submitted by the society that ss. 16a to 161
were number within the companypetence of the state legislature and
also because they infringed the fundamental rights of the
society guaranteed by arts. 14 19 1   c  19 1   f  and 31
of the companystitution. it was urged that by the act
unreasonable restrictions were imposed on the management of
educational institutions and the act companyferred unguided and
untrammelled powers upon executive authorities no
distinction having been made between well-managed and
badly-managed institutions. the high companyrt rejected the
contentions raised by the society. with special leave the
society has appealed to this companyrt. the effect of ss. 16a to 161 which were added to the u.p. act 2 of 1921 by the amending act 35 of 1958 is briefly
this. for every institution there shall be a scheme of
administration which shall amongst other matters provide for
the companystitution of a companymittee of management vested with
authority to manage and companyduct the affairs of the
institution and which shall describe the powers duties and
functions of the headmaster or the principal and of the
committee of management in relation to the institution and
that the headmaster or the principal of the institution and
two teachers thereof selected by rotation according to
seniority shall be exofficio members of the companymittee with a
right to vote  s. 16a . in the case of an institution
recognized at the date of companymencement of the intermediate
education  amendment  act 1958 a draft of the scheme of
administration shall be prepared and submitted to the
director for his approval  s. 16b  and if the scheme
of administration is number submitted within the time allowed
the director shall take action in accordance with cl.  a  or
 b  of sub-s.  3  of s. 16 d  s. 16c . the director is
authorised to inspect recognized institutions and to remove
defects or deficiencies found on inspection or otherwise and
if the management fails to companyply with any directions the
director may after companysidering the explanation or
representation if any given or made by the management
refer the case to the board for withdrawal of recognition or
recommend to the state government to proceed against the
institution in the manner provided by sub-s.  4  of s. 16.
if on receipt of a recommendation the state government is
satisfied that the affairs of the institution are being
mismanaged or the management of the institution has
wilfully or persistently failed in the performance of its
duties or the institution is being companyducted otherwise than
in accordance with the scheme of administration or the
draft of the scheme of administration has number been submitted
within the time allowed the state government may by order
provide for exercising companytrol over such institution by an
authorized companytroller for such period as may be specified
by the government and on the making of such order the
institution and its management shall so long as the order
continues in force be companyducted and carried on in
accordance with the provisions of the order and every
person having any function of management of such institution
shall companyply with such directions. where the management or
any person having any function of management does number companyply
with or refuses to carry out any direction given by the
authorized companytroller that officer may with the previous
approval of the state government and for such period as the
state government may fix take over the management of the
institution including management of the land buildings
funds and other assets belonging to or vested in the
institution to the exclusion of the management or any such
person and wherever the authorized companytroller so takes over
the management he shall have in relation to the management
of the institution all such powers and authority as the
management would have if the institution were number taken over
under sub-ss.  4  or  5   s. 16d . qualifications for
appointment as principals headmasters and teachers of
different subjects shall be prescribed by regulation and
there shall be companystituted in every recognized institution a
selection companymittee for selecting candidates for appointment
as teachers in the institution  s. 16e . qualifications
which the principal or headmaster or teacher shall possess
and the procedure for appointment of selected candidates to
the office of principal or headmaster or teacher are also to
be prescribed  s. 16f . every person employed in a
recognised institution shall be governed by such companyditions
of service as may be prescribed by regulations and any
agreement between the management and such employee insofar
as it is inconsistent with the provisions of the act or with
the regulations shall be void the
regulations shall inter alia provide for the period of
probation the companyditions of companyfirmation and the procedure
and companyditions for promotion and punishment scales of pay
and payment of salaries transfer of service from one
recognized institution to anumberher grant of leave and
provident fund and other benefits and maintenance of record
of work and service etc. the companymittee of management may
number remove or dismiss from service or reduce in rank or
reduce the emoluments of any principal headmaster or
teacher except with the prior approval in writing of the
inspector  s. 16g . by s. 16h the provisions of ss. 16a
16b 16c sub-ss.  2  to  7  of s. 16 d and ss. 16e 16f and
16g are number to apply to recognized institutions maintained
by the state government or the central government and in the
case of recognized institutions maintained by a local body
the state government may declare that all or any of those
provisions shall number apply or shall apply subject to such
alterations modifications or additions as it may make. the
director may by numberification in the official gazette
delegate all or any of the powers which he exercises under
the act except certain powers s. 161.
some of these provisions have been amended from time to time
by orders issued under s. 9 of the amending act. for
reasons which we will presently set out we do number propose
in this appeal to enter upon the question whether the
amendments were validly made. we have referred to the act
as it was originally enacted. companynsel for the society companytends that the amending act inso-
far as it incorporates ss. 16a to 161 in the u.p. act 2 of
1921 is beyond the legislative companypetence of the state
legislature because in substance it seeks to supersede the
provisions of the societies registration act 1860-a field
of legislation which is exclusively within the companypetence of
the parliament-and in any event because the act insofar as
it affects the powers of trustees of charitable institutions
cannumber be enacted without companyforming to the requirements of
art. 254.
management of the affairs of the society was entrusted by
its memorandum of association to the executive companymittee
but the society is required by s. 16a to submit a scheme of
administration providing for the companystitution of a companymittee
of management invested with authority to manage and companyduct
the affairs of the society and of this companymittee of
management the headmaster or the principal and two teachers
selected by rotation are ex officio members. the director
has the power to inspect the school and to interfere with
the management calling upon them to remove any defect or
deficiency found on inspection and the state government is
empowered to appoint an authorized companytroller to exercise
with respect to the institution and its management such
functions or companytrol as may be specified in the order of the
state government. in the matter of appointment and removal of the principal or
the headmaster and teachers the authority of the executive
comitttee of the society is restricted. management of the
affairs since the enactment of the amending act has
therefore to be carried on number in accordance with the
memorandum of association of the society but in accordance
with and subject to the provisions of ss. 16a to 161 as
added by the amending act. power of the state legislature to legislate under the head
education including universities in entry ii of list ii of
the 7th schedule would prima facie include the power to
impose restrictions on the management of educational
institutions in matters relating to education. the pith and
substance of the impugned legislation being in regard to
the field of education within the companypetence of the state
legislature authority to legislate in respect of the
maintenance of companytrol over educational institutions
imparting higher secondary education and for that purpose to
make provisions for proper administration of the educational
institutions was number denied. but it was said that the
impugned act is inumbererative to the extent to which it seeks
to impose companytrols upon the management of an educational
institution registered under the societies registration act
and managed through trustees and thereby directly trenches
upon legislative power companyferred by entry 44 of list i and
entries 10 18 of list iii. this argument has no
substance. ibis companyrt has in board of trustees v. state of
delhi  1  held that legislation which deprives the board of
management of a society registered under the societies
registration act of the power of management and creates a
new board does number fall within entry 44 of list 1 but falls
under entry 32 of list ii for by registration under the
societies registration act the society does number acquire a
corporate status. it cannumber also be said that the pith and
substance of the act relates to charities or charitable
institutions or to trusts or trustees. if the true nature
and character of the act falls within the express
legislative power companyferred by entry 11 of list ii merely
because it incidentally trenches upon or affects a
charitable institution or the powers of trustees of the
institution it will number on that account be beyond the
legislative authority of the state. the impact of the act
upon the rights of the trustees or the management of a
charitable institution is purely incidental the true object
of the legislation being to provide for companytrol over
educational institutions. the amending act was therefore
within the companypetence of the state legislature and the fact
that it incidentally affected the powers of the trustees or
the management in respect of educational institutions which
may be regarded as charitable companyld number detract from the
validity of the exercise of that power. a.i.r. 1962 s. c. 458.
the plea that certain specific provisions were invalid as
infringing arts. 19 31 and 14 may number be companysidered. section 16f  4  was challenged as companyferring an uncontrolled
power upon the regional deputy director of education. by
that provision when a recommendation for appointment of a
teacher or a principal or headmaster made by the management
has been rejected and anumberher selection made is again
disapproved after representation of the management is
considered the regional deputy director of education in
case of a teacher and the director in case of a principal
or headmaster may appoint any qualified person out of the
list of candidates applying for the vacancies and such
appointment is made final. it is clear that the selection
of teachers and principals or headmasters is in the first
instance left to the companymttee of management. but the
exercise of the power is subject to approval of the
education authorities. the educational authorities may
reject the selection after companysidering the representation of
the management. the selection companymittee would then have
power to make anumberher recommendation. if that second recom-
mendation also be number accepted after companysidering the
representation made by the management power is companyferred
upon the educational authorities to make appointments of
qualified persons out of the list of candidates applying for
the vacancies. but the person to be so appointed must
possess the prescribed qualifications and his name must be
included in the list of candidates applying for the vacancy
the provision is enacted in the interest of the students of
the institution. where the educational authorities do number
accept the suitability of a person selected by the manage-
ment on two successive occasions in respect of the same
vacancy the educational authorities have been given the
power to fill up the vacancy it is implicit in the
provision that the power has to be exercised by the
educational authority in the interest of the institution and
for serving the cause of education and it cannumber be said
that the power companyferred is uncontrolled. it was then urged that the provisions of s. 16b 3  read with
s. 16 d   3   a   b  are unreasonable provisions. by s.
16 d power is given to the director to inspect recognized
institutions and to direct removal of defects. if the
management fails to companyply with the directions made by the
director that officer may after companysidering the explanation
or representation if any given or made by the management
refer the case to the board for withdrawal of recognition or
recommend to the state government to proceed against the
institution under sub-s.  4  and the powers which the state
government may exercise after being satisfied that the
affairs of the institution are being mismanaged or that the
management has wilfully or persistently failed in the
performance of its duties include the power to appoint an
authorised companytroller to manage the affairs of the
institution for such period as may be specified by
the government. the provision is disciplinary and enacted
for securing the best interests of the students. the state
in a democratic set-up is vitally interested in securing a
healthy system of imparting education for its companying
generation of citizens and if the management is
recalcitrant and declines to afford facilities for
enforcement of the provisions enacted in the interests of
the students a provision authorising the state government
to enter upon the management through its authorized
controller cannumber be regarded as unreasonable. section 16b  3  authorises the state government to take
action under s. 16d  3  in the event of the scheme of
administration number being submitted. the basis of an
effective exercise of the companytrols envisaged by the amending
provisions is the scheme of administration for educational
institutions. if with a view to prevent enforcement of the
provisions of the act the management seeks to nullify the
control envisaged by the provisions of the act by the state
government a provision whereby companypliance with the
requirements of the statute may be secured cannumber also be
regarded as unreasonable. it was then urged that property of the society is taken away
under s. 16d  4  if the scheme of administration is number
submitted within the time allowed and the authorized
controller is appointed by the government pursuant to a
recommendation made under sub-s.  3  of s. 16d. but on a
plain reading of the terms of s. 16d  4  it is clear that
the powers companytemplated to be entrusted to the authorized
controller are merely of management. management of the
institution in respect of which an authorized companytroller has
been appointed has to be companyducted and carried on in
accordance with the directions given by the authorized
controller. the property companytinues to remain the property
of the institution only the right of management of the
recalcitrant managers is taken away temporarily to secure
compliance with the provisions of the act. temporary
deprivation of management to secure companypliance with the
provisions of the education act does number amount to depri-
vation of property of the educational institution which may
attract the protection guaranteed by art. 19 or art. 31 of
the companystitution. it was then urged that unlawful discrimination is made
between educational institutions maintained by private
citizens and institutions maintained by the state government
or the central government or local bodies. on that part of
the case it may be numbericed that the petition filed by the
society is singularly defective it is baldly averred in the
petition that the provisions of s. 16h are ultra vires of
the u.p. legislature as they are discriminatory and infringe
the guarantee of the fundamental freedom under art. 14 of
the companystitution. section 16h exempts all recognized educa-
tional institutions maintained by the state government and
the central government from the operation of certain
specified provisions of the act and in the case of
recognized institutions maintained by a local body the state
government may declare that all or any of those provisions
shall number apply or shall apply subject to such alterations
modifications or additions as it may make. prima facie
there is a justifiable classification between the privately
managed educational institutions and those maintained by the
state government the central government and local bodies. to claim the protection of art. 14 it must be shown that
persons differently treated are similarly situated and
discrimination is made with an uneven hand. in the
petition numberparticulars are furnished as to why the
classification made is number based on a rational basis having
relation to the objects sought to be achieved thereby. in
the affidavit which has been filed on behalf of the state by
the deputy director of education it is stated that since the
termination of the second world war there was a marked
increase in the number of private schools imparting higher
secondary education and there were many companyplaints against
the management of those schools and discontentment among
the teachers was rife. a companymittee appointed by the state
government to enquire into the companyditions of the private
institutions was of the view that the managing companymittees of
the private schools as then companystituted were unsatisfactory
as many of them were ridden by factions and they had failed
to give a sense of security to teachers that it was
necessary that teachers should have a right of
representation on such managing companymittees and that the
government should have power to supersede any managing
committee for persistent and serious dereliction of duty. anumberher companymittee appointed by the government of u.p. to
examine the progress of the scheme of reorganisation of
secondary education recommended that in the interest of
better management of number-govermment institutions the head of
the institution and representatives of the teachers of the
institution should be included in the managing companymittee of
each aided institution to support and safeguard the
legitimate interests of the teachers. the government had
also received representations from time to time from
associations interested in education that the service
conditions of teachers should be ameliorated and high
handedness on the part of the management of the recognized
institutions should be checked. from the statistics
collected by the director it appeared that a situation had
arisen which required effective measures to be adopted for
reasonably restricting the activities of the managing bodies
of the recognized institutions in the interest of the
students and the teachers with a view to harmonise the
relationship between the teachers and the management so as
to bring about an atmosphere companyducive to efficient
imparting of education. a table was incorporated in
paragraph-16 of the affidavit showing the number of
recognized educational institutions imparting higher
secondary education. from an analysis of that table it is apparent that between
the years. 1956-57 and 1959-60 the number of state
government institutions was less than 9 of the total
number of the institutions and them number of central
government institutions was less than 0-5 and that of local
bodies institutions approximately 2-5. the institutions
run by the state government central government and local
bodies were governed by definite rules laying down the
conditions of service of teachers and the institutions were
run through official agencies under companyditions which were
entirely different from the companyditions prevailing in the
privately managed institutions. anumberher table showed that
there was year after year great disparity between the
percentages of successful candidates trained in the
government and local body institutions and number-government
institutions. the materials placed on the record by the
state viewed in the light of companyplete absence of any
details furnished by the society are sufficient to indicate
that the plea of unlawful discrimination has numberbasis. it was then urged that the state had accorded to the society
and others similarly situated as against the anglo-indian
schools which are privately managed institutions a
discriminatory treatment to the detriment of the former. but there is numberspecific allegation in the petition in this
behalf. from the table submitted in paragraph-18 of the
affidavit of the director of education it appears that the
number of students appearing from the anglo-indian schools
is very small that numberadverse reports were received against
the management of such institutions and that there is a
separate companye of regulations for the anglo-indian schools in
the state of u.p. laying down the necessary companyditions with
regard to all the important aspects of their educational
activities and such institutions are number governed by the

p. educational companye of 1958 which applies to other
recognized institutions. a plea of unlawful discrimination
cannumber be adjudged unless the petition companytains a full
averment of the grounds on which equality is claimed and
the denial of equality is pleaded as number based on a rational
relation to the object sought to be achieved by the statute
which makes a classification. we therefore do number propose
to deal with this. question in this appeal. there only remains to be companysidered the challenge to the. validity of s. 9 of the amending act. by that section the
state government has been authorized for the purpose of
removing any difficulties in relation to the enforcement of
the act to direct that the act shall take effect subject to
such adaptations whether by way of modification addition
or omission as it may deem necessary or expedient and may
make such other temporary provision for the purpose of
removing any such difficulty as it may deem to be necessary
or expedient. the high companyrt was of the view that the
legislative policy has been laid down in the amending act
and by-
s.9 power has been companyferred on the state government for
the purpose of removing any difficulties in relation to the
enforcement of the act and since this may be done only
within a period of twelve months from the date of the
commencement of the act and the adaptations whether by way
of modification addition or omission may only be made for
the purpose of removing any difficulties in relation to the
enforcement of the act numberlegislative power was companyferred
thereby on the state government and on that account the
provisions are number invalid. the high companyrt also observed
that the period in respect of which various orders were
passed had expired and it was therefore immaterial for the
purpose of the petition to companysider whether s. 9 of the
impugned act is invalid. in our opinion on the averments
made in the petition and the materials brought before this
court it is unnecessary to enter upon the question as to
the validity of s. 9 and the orders issued thereunder. no
specific removal of difficulties order affecting the rights
or -the society has been brought to our numberice.


civil appellate jurisdiction civil appeals number. 1864-
1869 of 1972.
appeals by special leave from the judgment and order
dated 17-9-1971 of the delhi high companyrt in income-tax
reference number. 22 25 and 26 of 1970.

c. manchanda and a. d. mathur for the appellants. a. ramachnadran and miss a. subhashini for the
respondent. the judgment of the companyrt was delivered by
pathak j these appeals by special leave are
directed against a judgment dated september 17 1971 of the
high companyrt of delhi disposing of an income tax reference. there was a hindu undivided family companysisting of the
karta lala sham nath and his three sons rajinder nath ram
chander nath and a minumber surinder nath. the family carried
on business. on april 29 1949 land was acquired in sunder
nagar new delhi in the name of the karta and the price was
paid out of the books of the family. a building was
constructed on the land and was companypleted in september 1954.
anumberher building was companystructed in the following year on a
plot at golf links new delhi. on march 18 1950 there was a partial partition of the
hindu undivided family and its business was taken over by a
partnership firm messrs. faqir chand raghunath dass
consisting of lala sham nath and the two elder sons
rajinder nath and ram chander nath. the partnership firm
debited a sum of rs. 98418/- in the building account of the
firm towards the companyt of companystruction of the sunder nagar
property during the assessment year 1955-56. in the
assessment year 1956-57 the partnership firm debited a sum
of rs. 99148/-on account of the companystruction of the golf
links property. the assessees who are members of the partnership firm
field separate returns in their individual status for the
assessment years 1955-56 and 1956-57. they claimed that the
sunder nagar and the golf links properties belonged to the
four members of the family in their individual capacity. but
the income tax officer regarded the properties as belonging
to the partnership firm and in the assessment proceedings
of the firm for those years he estimated the companyt of
construction at a higher figure than the companyt disclosed and
made additions accordingly to the returned income of the
firm. the partnership firm appealed. allowing the appeals
the appellate assistant companymissioner deleted the additions. he found that when the companystruction of the buildings was
commenced the moneys were advanced by the new delhi branch
of the firm and the debit in its books was transferred to
the head office where one-fourth of the total expenditure
was debited to the account of each companyowner. on that he held
that the partneship firm was number the owner of the
properties and therefore it companyld number be said to have
earned any companycealed income. the income tax officer then initiated proceedings under
section 147 a  of the income tax act 1961 against the
individual assessees
for the assessment years 1955-56 and 1956-57 and the
additions on account of companycealed income originally made in
the assessments of the partnership firm were number divided
between the assessees and included in their individual
assessments. the income tax officer rejected the plea of the
assessees that as they had already disclosed that they had
invested in the properties when filing their original
individual returns there was numbercase for invoking section
147 a . the appellate assistant companymissioner on appeal
agreed that there was numberdefault on the part of the
assessees to warrant proceedings under section 147 a  and
that ordinarily the assessments would have been barred by
limitation. but the maintained the assessments on the ground
that section 153 3   ii  of the act applied. in second
appeal the income-tax appellate tribunal while rejecting
the companytention that the assessees were number companyered by the
expression any person in section 153 3  ii  pointed out
that nevertheless that provision companyld number be availed of by
the income tax officer because there was neither any
finding number a direction in the earlier order of the
appellate assistant companymissioner in companysequence of which or
to give effect to which the impugned assessments can be
said to have been made. it also observed that numberopportunity
had been afforded to the assessees of being heard as was
required by explanation 3 to section 153 3  before that
earlier order was made. the tribunal further expressed the
view that the appellate assistant companymissioner had no
jurisdiction in the appeals before him to companyvert the
assessments made by the income tax officer under section
147 a  to assessments passed under section 153 3   ii . the companymissioner of income tax obtained a reference to
the high companyrt of delhi on the following two questions-

whether on the facts and in the circumstances
of the case the appellate assistant companymissioner was
legally justified in holding that the provisions of
section 147 a  of the income-tax act 1961 were number
applicable to the case for the assessment years 1955-56
and 1956-57 respectively ? whether on the facts and in the circumstances
of the case the tribunal was justified in holding that
the appellate assistant companymissioner in appeals before
him companyld number companyvert the provisions of section 147 1
into those of section 153 3  ii  of the income-tax act
1961 and that provisions of section 153 3   ii  of the
act were number applicable to the instant case ? the high companyrt numbered the finding of the appellate
assistant companymissioner that the properties did number belong to
the partnership firm and therefore the excess amount of the
cost of companystruction companyld number be regarded as the companycealed
income of the firm. the high companyrt observed that such a
finding was necessary for the disposal of of the appeals
filed by the firm and as a companyollary it was held that the
buildings belonged to the companyowners. this according to the
high companyrt necessitated the direction to the income tax
officer that he was free to assess the excess amount in the
hands of the companyowners. the high companyrt taking the view that the companyowners were
partners of the firm and therefore companyered by the
expression any person in section 153 3  ii  of the income-
tax act held that the bar of limitation for making the
impugned assessments was raised by that provision and that
the assessments companyld be sustained by reference to that
provision. it answered the second question referred by the
tribunal in favour of the revenue and in the circumstances
considered it unnecessary to answer the first question. the present appeals have been filed by individuals who
are partners of the firm. numberappeal has been filed by
surinder nath who at the time when the partnership was
constituted was a minumber and was number admitted to the benefits
of the partnership. the case has been dealt with throughout on the basis
that if section 153 3   ii  of the act applies and the bar
of limitation thereby removed it is immaterial that the
assessments have been made under section 147 a  of the act. the question therefore is whether section 153 3  ii  can
be invoked. it is number companytended on behalf of the assessees
that they are number companyered by the expression any person in
section 153 3  ii  of the act. the only companytention is that
there is numberfinding or direction within the meaning of
section 153 3   ii  of the act in the order of the appellate
assistant companymissioner in companysequence of which or to give
effect to which the impugned assessments have been made. the expressions finding and direction are limited
in meaning. a finding given in an appeal revision or
reference arising out of an assessment must be a finding
necessary for the disposal of the particular case that is
to say in respect of the particular assessee and in
relation to the particular assessment year. to be a
necessary finding it must be directly involved in the
disposal of the case. it is possible in certain cases that
in order to render a finding in respect of a a finding in
respect of b may be called for. for instance where the
facts show that the income can belong either to a or b and
to numberone else a finding that it belongs to b or does number
belong to b would be determinative of the issue whether it
can be taxed as as income. a finding respecting b is
intimately involved as a step in the process of reaching the
ultimate finding respecting a. if however the finding as
to as liability can be directly arrived at without
necessitating a finding in respect of b then a finding made
in respect of b is an incidental finding only. it is number a
finding necessary for the disposal of the case pertaining to

the same principles seem to apply when the question is
whether the income under enquiry is taxable in the
assessment year under companysideration or any other assessment
year. as regards the expression direction in section
153 3  ii  of the act it is number well settled that it must
be an express direction necessary for the disposal of the
case before the authority or companyrt. it must also be a
direction which the authority or companyrt is empowered to give
while deciding the case before it. the expressions finding
and direction in section 153 3   ii  of the act must be
accordingly companyfined. section 153 3  ii  is number a provision
enlarging the jurisdiction of the authority or companyrt. it is
a provision which merely raises the bar of limitation of
making an assessment order under section 143 or section 144
or section 147. income tax officer a-ward sitapur v.
murlidhar bhagwan das and n. kt. sivalingam chettiar v.
commissioner of income-tax madras. the question formulated
by the tribunal raises the point whether the appellate
assistant companymissioner companyld companyvert the provisions of
section 147 1  into those of section 153 3  ii  of the act. in view of section 153 3  ii  dealing with limitation
merely it is number easy to appreciate the relevance or
validity of the point. in the present case the appellate assistant
commissioner found that the companyt of companystructing the two
buildings had number been met by the partnership firm. the firm
had merely advanced money to the individual four companyowners
whose personal accounts in the books of the firm had been
debited accordingly. on that material the appellate
assistant companymissioner held that the partnership was number the
owner of the property and companysequently any excess over the
disclosed companyt of companystruction companyld number be added in the
assessments of the firm. all that has been recorded is the
finding that the partnership firm is number the owner of the
properties. it is true that the finding proceeds on the
basis that the companyt has been debited in the accounts of the
four companyowners. but that does number mean without anything
more that the excess over the disclosed companyt of
construction companystitutes the companycealed income of the
assessees. the finding that the excess represents their
individual income requires a proper enquiry and for that
purpose an opportunity of being heard is needed to be given
to the assessees. indeed that is number plainly required by
explanation 3 to section 153 3 . the expression anumberher
person in the explanation would include persons intimately
connected with the person in whose case the order is made in
the sense explained by this companyrt in murlidhar bhagwan das
 supra . it is one thing for the partners of a firm to be
required to explain the source of a receipt by the firm it
is quite anumberher for them in their individual status to be
asked to explain the source of amounts received by them as
separate individuals. on such opportunity being provided it
would have been open to the assessees to show that the
excess alleged over the disclosed companyt of companystruction did
number companystitute any taxable income. the finding companytemplated
in explanation 3 it will be numbered is a finding that the
amount represents the income of anumberher person. we are
unable to hold that the observation of the appellate
assistant companymissioner can be described as such a finding in
relation to the assessees. it is also number possible to say that the order of the
appellate assistant companymissioner companytains a direction that
the excess should be assessed in the hands of the companyowners. what is a direction for the purposes of section 153 3  ii
of the act has already been discussed. in any event
whatever else it may amount to on its very terms the
observation that the income tax officer is free to take
action to assess the excess in the hands of the companyowners
cannumber be described as a direction. a direction by a
statutory authority is in the nature of an order requiring
positive companypliance. when it is left to the option and
discretion of the income tax officer whether or number to take
action it cannumber in our opinion be described as a
direction. therefore in our judgment the order of the appellate
assistant companymissioner companytains neither a finding number a
direction within the meaning of section 153 3  ii  of the
income tax act in companysequence of which or to give effect to
which the impugned assessment proceedings can be said to
have been taken. reliance was placed by the revenue on companymissioner of
income-tax andhra pradesh v. vadde pullaiah company in that
case. there were two appeals before the appellate assistant
commissioner an appeal by the firm and anumberher by pulliah
a partner of the firm filed in his individual status. the
question was whether the business was the business of the
firm or that of pullaiah. in order to decide the appeal of
the firm as well as that of pullaiah the appellate
assistant companymissioner had to decide whether the business
was that of the firm or that of pullaiah. in finding that
the business was that of the firm and number of pullaiah the
appellate assistant companymissioner had necessarily to inquire
into a matter which companyered the subject matter of both the
appeals. in the circumstances differing from the high companyrt we
held that the provisions of section 153 3   ii  of the
income tax act are number applicable to the instant case. the
question is answered in favour of the assessees and against
the revenue. the high companyrt did number enter into the first question
formulated for its opinion that is to say whether the
provisions of section 147  a  of the income tax act are
applicable for the assessment years 1955-56 and 1956-57. it
is agreed by the parties that if section 153  3   ii  of the
act cannumber be invoked by the revenue it is necessary to
decide the first question formulated by the tribunal. in
view of the opinion expressed by us on the application of
section 153 3  ii  of the act the case must go back to the
high companyrt for its opinion on the first question. the appeals are allowed the judgment dated september
17 1971 of the high companyrt governing the cases of the
different assessees for the assessment years 1955-56 and
1956-57 is set aside. the provisions of section 153 3  ii
of the income tax act 1961 are number applicable to the
instant case.


civil appellate jurisdiction special leave petition
 civil  number 1863 of 1986.
from the judgment and order dated 10.12.85 of the
madhya pradesh high companyrt in misc. civil case number 297 of
1981.
dr. n.m. ghatate and s.v. deshpande for the
petitioners. kuldip singh additional solicitor general b.b. ahuja
and miss a. subhashini for the respondents. the judgment of the companyrt was delivered by
sabyasachi mukharji j. this petition for leave to
appeal is directed against the judgment and order dated 10th
december 1985 of the high companyrt of madhya pradesh jabalpur
bench. the high companyrt upheld the imposition of penalty as
well as the addition of alleged companycealed income in the
income-tax assessment of the peti
tioner. the relevant assessment year with which we are
concerned in this application is 1974-75.
it appears that the petitioner had submitted his return
of income for the assessment year 1974-75 showing a total
income of rs.3113 in response to a numberice issued under
section 143 2  of the act of the income-tax act 1961
 hereinafter called the act . according to the petitioner
he had derived his income from 2 stores i.e. m s. mohanani
fancy general stores and m s. roopkala general stores durg. it however appears that on 19th january 1974 on the basis
of the order passed by the superintendent central excise
jagpur dated 25th december 1975 there was companyfiscation of
foreign watches from the house of the petitioner and levy of
penalty of rs.2 lakhs under the customs act 1962.
accordingly the income tax officer issued a numberice calling
upon the assessee to show-cause why the value of the watches
seized from his residence should number be treated as his
income from undisclosed sources. in this companynection it may
be relevant to numbere that on 12th may 1973 a search was made
of the petitioners bed-room from where a total of 565
wrist-watches of foreign make valued at rs.87455 were
seized from a suit-case and in a secret cavity of a looked
steel almirah and also behind the almirah there were watches
folded in a bundle of waste papers. a panchnama was prepared
at the same time mentioning these facts. according to the
customs authorities the petitioner found himself unable to
make any statement at that time on account of which
recording of statements was deferred. however it is stated
the petitioner went out of the station on 14th may 1973.
the petitioners statement was recorded on 13th may 1973 as
soon as he was available. in his statement annexure r-iii
duly signed by him he has admitted these facts and merely
denied knumberledge of the manner in which those watches came
to be in his house. it appears from the records of the customs case with
which we will have to deal later in s.l.p. number 1008/86 the
petitioner was given a show-cause numberice as to why the
period of six months fixed under section 110 2  of the
customs act 1962 should number be extended but numberreply was
given by the petitioner till 10th numberember 1973 or even
thereafter. hence by an order dated 10th numberember 1973
before the expiry of six months time was extended by the
collector of customs for a further period of 6 months for
giving a numberice as required under section 124 a  of the
customs act 1962. under the proviso to subsection 2 of
section 110 of the customs act 1962 a show-cause numberice
specifying the requisite particulars was given to the
petitioner on 4th may 1974. in the reply the petitioner
made a general denial. the
enquiry was fixed on 30th october 1975 for giving a
personal hearing to the petitioner when the petitioners
counsel appeared and sought for an adjournment to 20th
numberember 1975 which was granted. however on 20th
numberember 1975 the companynsel of the petitioner stated that the
petitioner did number want to avail of the opportunity of
personal hearing or even to cross-examine the witnesses in
whose presence the panchayatnama was made at the time of the
seizure of the watches. it is necessary to bear these facts
in mind because it has repercussions to the numberice dated
19th january 1974 as mentioned hereinbefore issued by the
income tax officer to show-cause why the aforesaid sum of
rs.90768 should number be treated as the petitioners
concealed income. the income tax officer further directed
issuance of the numberice under section 271 1  c  of the act. being aggrieved by the said order the petitioner
preferred an appeal before the appellate assistant
commissioner against the order dated 20th february 1976.
the appellate assistant companymissioner dismissed the appeal
and held that in view of the order passed by the companylector
of customs the income tax officer was justified in
including the companyt of the watches in the income of the
assessee for the assessment year 1974-75. thereafter on
29th march 1978 the assistant companymissioner of the income-
tax issued numberice of penalty under section 271 1  c  of the
act imposing penalty of rs.90000 minimum imposable being
rs.87455 and maximum imposable being rs.174910. being
aggrieved thereby the petitioner filed two appeals before
the income tax appellate tribunal. the tribunal by its order
dated 19th august 1980 dismissed these appeals. the
petitioner has further stated that in the meanwhile the
state of madhya pradesh initiated criminal proceedings under
section 125 read with 111 of the customs act 1962 and the
learned chief judicial magistrate durg by his order
convicted the petitioner and awarded one years rigorous
imprisonment. thereafter on 2nd numberember 1982 the
petitioner filed an appeal in the companyrt of additional judge
in the companyrt of sessions who by his judgment allowed the
appeal and acquitted the petitioner of the said criminal
charge. thereafter there was a reference to the high companyrt on
two questions against the order of the income-tax tribunal
under section 256 1  of the act. the questions are as
follows-

whether on the facts and in the
circumstances of the case was the tribunal
justified in holding that the assessee was the
owner of the watches and thus including the value
thereof in the assessment of the assessee? whether on the facts and in the
circumstances of the case the tribunal was
justified in holding that the department had
discharged its burden for establishing the
concealment of income by the assessee for the year
under companysideration and thus companyfirming the
penalty of rs.90000 levied by the inspecting
assistant companymissioner of income tax? the high companyrt in its order numbered that the raiding
party by virtue of the search entered into the bed-room of
the assessee on 12th may 1973 and seized the watches. a
panchnama was prepared. the department found that the
assessee was the owner. section 110 of the evidence act is
material in this respect and the high companyrt relied on the
same which stipulates that when the question is whether any
person is owner of anything of which he is shown to be in
possession the onus of proving that he is number the owner is
on the person who affirms that he is number the owner. in other
words it follows from wellsettled principle of law that
numbermally unless companytrary is established title always
follows possession. in the facts of this case indubitably
possession of the wrist-watches was found with the
petitioner. the petitioner did number adduce any evidence far
less discharged the onus of proving that the wrist-watches
in question did number belong to the petitioner. hence the
high companyrt held and in our opinion rightly that the value
of the wrist-watches is the income of the assessee. in this
connection reference may be made to the views expressed by
justice tulzapurkar as his lordship then was of the bombay
high companyrt in the case of j.s. parkar v. v.b. palekar 94
itr 616 where on difference of opinion between justice
deshpande and justice mukhi justice tulzapurkar agreed with
justice deshpande and held the question whether on the
evidence established the petitioner was the owner of the
gold seized though there was numberdirect evidence placed
before the taxing authorities to prove that the petitioner
had actually invested moneys for purchasing the gold in
question the inference of the ownership of the gold in the
petitioner in that case rested upon circumstantial evidence. there also gold was seized from a motor launch belonging to
the petitioner in that case. there a companytention was raised
that the provision in section 110 of the evidence act where
a person was found in possession of anything the onus of
proving that he was number the owner was on the person who
affirmed that he was number the owner was incorrect and
inapplicable to taxation proceedings. this companytention was
rejected. the high companyrt of bombay held that what was
meant by saying that the evidence act did number apply to the
proceedings under the act was that the rigour of the rules
of evidence companytained in the evidence act was number
applicable but that did number mean that the taxing authorities
were desirous in invoking the principles of the act in
proceedings before them they were prevented from doing so. secondly all that section 110 of the evidence act does is
that it embodies a salutary principle of companymon law
jurisprudence which companyld be attracted to a set of
circumstances that satisfy its companydition. we are of the opinion that this is a companyrect approach
and following this principle the high companyrt in the instant
case was right in holding that the value of the wrist-
watches represented the companycealed income of the assessee. section 69a of the act was inserted in the finance act
1964 and it came into force w.e.f. 1st january 1964. the
high companyrt has rightly held that the expression income as
used in section 69a of the act has wide meaning which meant
anything which came in or resulted in gain. hence in the
facts of this case a legitimate inference companyld be drawn
that the assessee had income which he had invested in
purchasing the wrist-watches and as such that income was
subject to tax. in the view the high companyrt was justified in
justifying the tribunals holding that the assessee was the
owner of the wrist-watches and thus including the value in
the assessment of the income of the assessee as his wealth
and so deemed to be the income of the assessee by virtue of
section 69a of the act companypled with surrounding
circumstances. therefore inclusion of the money in
purchasing the wrist-watches that is to say rs.87455 was
correct and proper for the assessment year under reference. in this companynection section 69a of the act may usefully be
set out as follows
where in any financial year the assessee is found
to be the owner of any money bullion jewellery
or other valuable article and such money bullion
jewellery or valuable article is number recorded in
the books of account if any maintained by him
for any source of income and the assessee offers
numberexplanation about the nature and source of
acquisition of the money bullion jewellery or
other valuable article or the explanation offered
by him is number in the opinion of the assessing
officer satisfactory the money and the value of
the bullion jewellery or other valuable article
may be deemed to be the income of the assessee for
such financial year. so far as the first question is companycerned the high
court answered accordingly and in our opinion rightly. as regards the second question section 271 1  c  of
the act was inserted in the finance act 1974 which reads as
follows
explanation where the total income returned
by any person is less than eighty per cent of the
total income  hereinafter in the explanation
referred to as the companyrect income  as assessed
under section 143 or section 144 or section 147
 reduced by the expenditure incurred bona fide by
him for the purpose of making or earning any
income included in the total income but which has
been disallowed as a deduction  such person shall
unless he proves that the failure to return the
correct income did number arise from any fraud or any
gross or wilful neglect on his part be deemed to
have companycealed the particulars of his income or
furnished inaccurate particulars of such income
for the purposes of clause  c  of this sub-
section. from the facts found by the revenue the assessee had
shown only a total income of rs.3113 and subsequently the
raiding party seized wrist-watches worth rs.87455. thus the
value of that income was included in the assessable income
of the assessee. therefore the total assessable income of
the assessee came to rs.90568 whereas the returned income
was rs.3113 which was certainly less than 80 of the total
income and as such explanation applied. accordingly the
revenue has discharged the onus of proving companycealment of
income. this view was expressed by a full bench of punjab
haryana high companyrt in vishwakarma industries v. companymissioner
of income-tax 135 itr 652 where all the relevant
authorities have been discussed. in that view of the matter and in view of the
principles behind the purpose of explanation the assessee
in the instant case has failed to discharge his onus of
proof. the aforesaid explanation was amended by finance act
1964 with effect from 1st april 1964. the amendment was
prospective in effect and in the year under reference the
amendment was in force.


civil appellate jurisdiction civil appeal number 79 of 1954.
appeal from the judgment and order dated march 10 1953 of
the former pepsu high companyrt in letters patent appeal number 493
of samvat 2005 arising out of the judgment and order dated
january 18 1949 of the said high companyrt in e. as. number. 78-
96 of samvat 2001.
naunit lal for the appellants. mohan behari lal for the respondents. 1957. numberember 11. the following judgment of the companyrt was
delivered by
kapur j.-this is an appeal brought pursuant to a certificate
under art. 133 1  c  of the companystitution from the judgment
and order of the division bench of the erstwhile pepsu high
court pronumbernced on march 10 1953 modifying in appeal the
order of the liquidation judge. the facts are fully recited in the judgments of the companyrts
below and companyparatively a brief recital will be sufficient
for the purpose of this judgment. the appellant companypany was
incorporated in 1934 under the companypanies act of the
erstwhile patiala state. it carried on the business of
commission agency for dealing in forward transactions in
various kinds of grain and other companymodities. the
respondent- firm ganpat rai hira lal of narnaul-besides
being a shareholder of the appellant companypany had dealings
with it and entered into several forward transactions of
sale and purchase of grain and other companymodities. the
appellant acting as a companymission agent of the respondent
and its other companystituents entered into several transactions
of forward delivery at hapur with firm pyarelal musaddi lai
who were carrying on companymission agency business at hapur
 and will hereinafter be termed the hapur firm . the total
profits of the transactions entered into by the appellant
with the hapur firm was rs. 48250 on which the hapur firm
paid rs. 14730-8 as income-tax. the profits accruing on
the transactions entered into on behalf of the respondent
amounted to rs. 29275-2-6 on which the proportionate
income-tax claimed to have been paid was
rs. 9314-13-4. on may 20 1943 the appellant was ordered
to be wound up and udmi ram aggarwal a pleader of the old
patiala high companyrt was appointed its liquidator. the list
of companytributories was settled on october 21 1943 and the
respondent was placed on that list. though this matter was
challenged in the appeal before the high companyrt it is no
longer in companytroversy between the parties. the official liquidator on march 18 1944 applied under s.
186 of the patiala companypanies act for a payment order for
rs. 12204-12-3 against the respondent and in support of his
claim he filed with this application companyies of the
respondents account in the books of the appellant showing
how the amount claimed was due from the respondent. this
amount included the sum of rs. 9476-13-0 on account of
income-tax paid by the hapur firm for and on behalf of the
respondent on the profits of the forward transactions at
hapur and the companymission of the hapur firm. the respondent
raised several objections and pleaded inter alia that the
hapur firm with whom the appellant had entered into forward
transactions had numberright to demand any income-tax from the
appellant as numberprofit had accrued to the appellant which
was acting as a companymission agent and was only entitled to
the companymission . it was also pleaded that as on the total
number of transactions entered into between the respondent
and the appellant there was a loss the respondent was number
liable to pay any income-tax and that the respondent had no
taxable income in the year under dispute or in any other
year. on may 23 1944 the respondent filed an application
in which it was submitted that the hapur firm who were
agents of the appellant at hapur had retained rs. 14730-8-
0 which was in trust with them under s. 42 of the income
tax act and prayed that the official liquidator be
directed to apply to the income tax authorities for a refund
of the amount retained and paid by the hapur firm as numbertax
was really due on the transactions entered into by the
appellant with the hapur firm and numbere was payable by the
respondent. after evidence was led by both parties the payment order was
made by the learned liquidation judge on january 18 1949
for a sum of rs. 8191-0-9 which included a sum of rs. 6867-9-6 the proportionate amount of income-tax due on the
profits accruing on the respondents transactions. against
this order the respondent took an appeal to the division
bench and canvassed two points  1  that the respondent
could number be settled on the list of companytributories and  2
that it was number liable for the amount retained for payment
of income-tax from out of profits on the transactions
entered into on its behalf by the appellant with the hapur
firm and subsequently paid by the latter. the companyrt
negatived the former companytention and held that the respondent
had rightly been settled on the list of companytributories and
upheld the latter companytention and held following a judgment
of the judicial companymittee of the ijlas-khas of patiala in
panna lal mohar singh v. aggarwal chamber  1  that the
official liquidator of the appellant was riot entitled to
claim the amount of income-tax paid by the hapur firm. the
judicial companymittee ljlas-khas had held
before the liability of the companytributory can be fixed it
must be shown that his income was such on which income was
assessable it is number denied that the companytributory
was carrying on other transactions in india a- it stood
before partition through other person. it was therefore his
entire income that was to be taken into companysideration to
assess his liability to income-tax. the appellant then applied for a certificate to appeal under
art. 133 1  c  which was granted in the following terms
the first question is whether a decision given by one
judge of the judicial companymittee can be regarded in law as a
decision of the companymittee. the second is whether the
principle laid down by the learned judge of the judicial
committee that the aggarwal chamber of companymerce was number
entitled to recover from its clients the proportionate share
of the income-tax paid by it unless it was shown that the
total amount

c. a. 60 of 2005 s.
of income of the clients was assessable to income-tax was
sound. accordingly we allow the petition and grant the
certificate. the first point has number been canvassed before us and in the
view that we have taken it would be unnecessary to go into
that matter. the sole point for decision is whether the
respondent is liable for income-tax which has been paid by
the hapur firm on the transactions which were entered into
by the appellant with the hapur firm for and on behalf of
the respondent? there is numberfinding by the high companyrt that
the respondent had entered into any forward transactions in
british india or at hapur with any firm other than the hapur
firm and this matter was number agitated before us number is
there any finding as to the total world income of the
respondent and there is numbermaterial on the record from which
it companyld be determined. the appellant is a number-resident companypany and the respondent
is a number-resident residing at narnaul in what was the
indian state of patiala. the appellant entered into forward
transactions on behalf of the respondent at hapur in which
there was a companysiderable amount of profit. the high companyrt
has found that the hapur firm paid rs. 6867-9-0 on account
of income-tax which was payable on the profits made on the
transactions entered into with the hapur firm for and on
behalf of the respondent. the respondent challenged its
liability to pay income-tax on the ground that it was
liable
only on his total earnings during the year under
assessment and since as is clear even from the books of the
respondent he had suffered heavy losses in his business at
narnaul his total income was number assessable to any income-
tax. the learned liquidation judge held the respondent liable for
the amount of the income-tax by applying s. 69 of the
contract act. the division bench on appeal disallowed this
item on the ground that it had number been shown that the
total earnings of the respondent were taxable under the
act. neither of the
courts below have discussed the relevant provisions of the
act number even s. 42 which was mentioned by the respondent in
his application of may 23 1944 number have they given a
finding as to the jural relationship of the hapur firm with
the respondent. the agency of the hapur firm was number
seriously disputed before us number repudiated. the case seems
to have proceeded on the basis of this agency in the companyrts
below. the hapur firm was employed by the appellant for
forward transaction business of the respondent who has
accepted the transactions entered into as also the amount of
the profit accruing on those transactions and is only
disputing the amount of income-tax deducted retained and
paid on those profits. under the law the hapur firm would
be an agent of the respondent for that part of the business
of the agency as was entrusted to it and privity of
contract arises between the principal and the substitute . section 194 of the companytract act de bussche v. alt  1 . it is number necessary to refer to the relevant provisions of
the income-tax act in force in the assessment year 1942-43
 hereinafter termed the act . it is number clear as to what
was the signification of the words total earnings used
by the high companyrt because it is number used in the income tax
act which uses two expressions total income and
total world income in sub-s. 15 of s. 2 of the act. the
definition of total income companyprises two things  i  the
total amount of income profits and gains referred to in s.
4 1  and  ii  companyputation in the manner laid down in the
income tax act. total world income includes all income
profits and gains wherever accruing or arising except income
to which under the provisions of s. 4 3  the act does number
apply. thus in the case of the respondent who is a numberresident
total income would companyprise income profits and gains
received or accrued in british india or deemed to be
received or to accrue in british india. section 17 of the
act which was relied upon by the respondents companynsel occurs
in chapter iii dealing with
 1  1878  8 ch d. 286 311
taxable income . it provides for the determination of tax
payable in certain special cases of which the case of a
number-resident is one. it provided
where a person is number resident in british india and is a
british subject as defined in section 27 of the british
nationality and status of aliens act 1914  4 5 geo. v.
ch. 17  or a subject of a state in india or burma or a
native of a tribal area the tax including super-tax
payable by him or on his behalf on his total income shall be
an amount bearing to the total amount of the tax including
super-tax which would have been payable on his total world
income had it been his total income the same proportion as
his total income bears to his total world
income section 17 does number deal with or affect
the rights and liabilities of persons required under the act
to make deductions of income-tax from sums payable to number-
residents or the companysequences of failure to make such
deductions. the very next chapter  chapter iv  deals with deductions
which the act requires to be made in regard to different
heads of income. section 18 provides for deduction at the
source. sub-s. 3 a of this section was as under-
s.18 3a  any person responsible for paying to a person number
resident in british india any interest number being interest
on securities or any other sum chargeable under the
provisions of this act shall at the time of payment
unless he is himself liable to pay income-tax thereon as an
agent deduct income-tax at the maximum rate. the proviso to this sub-section made provision for payment
of monies without deduction if there was a certificate of
the income tax officer to that effect. under s. 18 7  of
the act a person making the deduction was required to pay
the amounts so deducted to the income tax authorities. in
default of such deduction such person became an assessee in
respect of the tax. chapter v of the act deals with liability in special
cases which includes agents. section 40 2
dealing with the case of trustees or agents of a person number-
resident in british india provided
s.40  2  where the trustee or agent of any person number
resident in british india and number being a minumber lunatic or
idiot  such person being herein after in this such section
referred to as a beneficiary . is entitled to receive on
behalf of such beneficiary or is in receipt on behalf of
such beneficiary of any income profits or gains chargeable
under this act the tax if number levied on the beneficiary
direct may be levied upon and recovered from such trustee
or agent as the case may be in like manner and to the same
amount as it would be leviable upon and recoverable from the
beneficiary if in direct receipt of such income profits or
gains and all the provisions of this act shall apply
accordingly. thus under this section which is essentially a machinery and
an enabling section the tax to be realised from a number-
resident companyld be levied upon the agent in the same manner
as it companyld have been leviable upon and recoverable from a
number-resident. section 42 1  of the act provided
all income profits or gains accruing or arising whether
directly or indirectly through or from any business
connection in british india or through or from any property
in british india or through or from any asset or source of
income in british india or through or from any money lent
at interest and brought into british india in cash or in
kind shall be deemed to be income accruing or arising
within british india and where the person entitled to the
income profits or gains is number resident in british india
shall be chargeable to income-tax either in his name or in
the name of his agent and in the latter case such agent
shall be deemed to be for all the purposes of this act the
assessee in respect of such income. in proviso 2 to this sub-section any such agent who
apprehended that he might be taxed as such agent companyld
retain out of any money payable to such number. resident a sum
equal to the estimated liability under the sub-section and
in the event of any disagreement between the number-resident
and such agent a certificate
could be obtained from the income tax officer as to the
amount to be retained which shows that the act had a
provision for the determination of the question. as was
observed by viscount cave in williams v. singer  1
the fact is that if the income tax acts are examined it
will be found that the person charged with tax is neither
the trustee number the beneficiary as such but the person in
actual receipt and companytrol of the income which it is sought
to reach. the object of the acts is to secure for the state
a proportion of the profits chargeable and this end is
attained  speaking generally  by the simple and effective
expedient of taxing the profits where they are found. see also archer shee v. baker  2   executors of estate of
dubash v. companymissioner of income tax  3 . this has rightly been stated to be the underlying principle
of the deduction under ss. 40 41 and 42. section 48 of the
act deals with refunds and if the respondent thought that it
was number liable to the payment of any tax it companyld apply to
the income tax officer for refund. thus the hapur firm being an agent companyld be held liable
under ss. 40 2  and 42 1  of the act as an assessee for
income-tax on the profits made on the respondents
transactions at hapur and was therefore entitled under the
proviso to s. 42 1  to retain the estimated amount of
income-tax payable on the amount of the respondents profits
which in this case was deducted retained and actually paid. this fact has number been challenged before us. the ground on
which this liability is attacked is that the total world
income of the respondent was number taxable and therefore on
the profits made on the hapur transactions the british
indian tax authorities companyld number levy any tax. this
contention disregards the provisions of and liability
arising under ss. 40 2  and 42 1  and the proviso thereto. it also is companytrary to the principle of taxing statutes that
the profits are taxed where they are found. in this case
they were in the hands of the hapur firm
 i   1920  7 t. c. 387 411  h.l. .  2   1927  i i t.c. 749 770  h.l. .  3  1951 19 i.t.r. 182 189  s.c. . which was in receipt and companytrol of the income. the agent
at hapur having lawfully and properly paid the tax under
the act that amount has been rightly deducted from the
profits accruing on the hapur transactions. the judgment of the judicial companymittee of the ljlas-i-khas
on which the high companyrt has based its decision suffers from
the infirmity that it ignumberes both the provisions of and
principle underlying ss. 40 2  and 42 1  of the act and the
proviso thereto relating to the liability of an agent under
the act and the law of agency relating to employing of sub-
agents by agents. if the hapur firm rightly paid the tax on
the profits the respondent cannumber be allowed to challenge
the amount on the ground that his total world income was number
taxable and he was entitled to his profits without
deductions. that is a question which ha to be agitated
by the number-resident assessee at the time of his assessment. those persons who are bound under the act to make deduction
at the time of payment of any income profits or gains are
number companycerned with the ultimate result of the assessment. the scheme of the act is that deductions are required to be
made out of salaries  interest on securities and
other heads of income profits and gains and adjustments
are made finally at the time of assessment. whether in the
ultimate result the amount of tax deducted or any lesser or
bigger amount would be payable as income-tax in accordance
with the law in force would number affect the rights
liabilities and powers of a person under s. 18 or of the
agent under ss. 40 2  and 42 1 . as to what would be the
effect and result of the application of s. 17 if and when
any appropriate prceedings are taken is number a matter which
arises in this appeal between the appellant and the
respondent number can that matter be adjudicated upon in these
proceedings. that is a matter which would be entirely
between the respondent and the income tax authorities seized
of the assessment. our attention was drawn to two cases  1  companymissioner of
income-tax v. currimbhoy ebrahim sons 1
 1   1935  3 i.t.r. 325  p.c.  in that case the assessee companypany had been treated as an
agent of the nizam of hyderabad who had lent to the assessee
company a sum of rs. 50 lakhs. the assessee companypany had
paid in the assessment year a sum of rs. 3 lakhs on account
of interest and it was held that the interest earned by the
nizam did number accrue or arise to the nizam through or from
any business companynection with the assessee companypany in british
india or from any property within british india and there-
fore s. 42 was number applicable. numberquestion of business
connection was raised in the companyrt below and the argument
there proceeded on the basis that the respondent was number
liable for this amount on account of income-tax because the
entire income was number assessable to income tax. the
argument of isolated transactions based on the anglo-french
textile company limited v. companymissioner of income-tax madras 1  is
number available to the respondent number was the foundation for
any such argument laid in the companyrts below or raised in the
statement of the case filed by the respondent in this companyrt. anumberher case on which reliance was placed is greenwood v. f.

smidth and companypany 2  . that was a case of a danish firm
resident in companyenhagan. it manufactured and dealt with
cement making machinery which it exported to other
countries. it had an office in london in charge of a
qualified engineer who received enquiries for machinery such
as the firm companyld supply sent to denmark particulars of the
work which the machinery was required to do and when the
machinery was supplied he was avilable to give english
purchaser the benefit of his experience in erecting it. the
contracts between the firm and their customers were made in
copenhagan and the goods were shipped f. 0. b. companyenhagan. it was held in that case that the firm did number exercise a
trade within the united kingdom within the meaning of sch. d of s. 2 of the income tax act 1853 and was therefore number
assessable to income-tax. this decision is number relevant to
the case number before us as the facts were different and the
dicision was under a different statute.  1  1953 s.c.r. 454.