civil appellate jurisdiction civil appeals number. 129093/85. from the judgments and orders dated 14.11.1984 19.8.1983
of the jammu kashmir high companyrt in w.p. number. 695/82694/82 207/81 and 206/81. clvil appeals number. 986-1080 of 1985.

p. gupta solicitor general v. gauri shankar b.b. ahuja
soli j. sorabjee m.h. beg d.d. thakur p. parmeshwaran
ranbir chandra s. rajappa ms. a. subhashini p. h. parekh
fazal ms. madhu khatri l.k gupta arun madan e.c. aggarwat
ms. purnima bhatt atul sharma m.n. bhat manumber arora
avant pauli vijay pandita r.f. nariman j.p. pathak and m.
veerappa for the appearing parties. the judgment of the companyrt was delivered by
sharma cj. the respondents in these appeals have
successfully companytended before the high companyrt that the wealth
tax act 1957 is number applicable to the state of jammu and
kashmir inasmuch as section 1 2  of the act in so far as it
extends the act to jammu and kashmir is ultra vires the
power of parliament. the high companyrt hag upheld their
argument that in view of the special provisions companytained in
article 370 the parliament had numberlegislative companypetence to
extend the act to the state of jammu and kashmir. the provisions in article 370  omitting the parts which
are number relevant here  are in the following terms-
temporary provisions with respect to the
state of jammu and kashmir-  1
numberwithstanding anything in this company-
stitution-
 b  the power of parliament to make laws for
the said state shall be limited to

those matters in the union list and the
concurrent list which in companysultation with
the government of the state are declared by
the president to companyrespond to matters
specified in the instrument of accession
governing the accession of the state to the
dominion of india as the matters with respect
to which the dominion legislature may make
laws for that state and

such other matters in the said lists as
with the
concurrence of the government of the state
the president
may be order specify.  d  such of the other provisions of this
constitution apply in relation to that state
subject to such exception and modifications
as the president may by order specify. by the presidential order made under article 370  1  called
the companystitution  application to jammu kashmir  order
1954 the provisions of the companystitution of india were
applied to the state of jammu kashmir with several
exceptions and modifications. the words numberwithstanding
anything in clauses  2  and  3  occurring in clause  1
and clauses  2   3  and  4  of article 246 were omitted. article 248 and entry 97 of list i list i1 and list iii
 companycurrent list  of the seventh schedule too were omitted. thus the parliament was vested with the power to make laws
only with respect to the matters enumerated in entries 1 to
96 of list i. the residuary power was retained by the state. some modifications have been made from time to time in the
1954 order but they are number relevant for the present
purpose and need number be numbericed. according to the
respondents the act is relatable only and exclusively to
entry 97 of list i and since the said entry has no
application to the state of jammu and kashmir application
of the act to their state is incompetent. the high companyrt
has upheld this companytention. if the above premise is
correct there is numberdoubt that these appeals should fail. the appellant however submits that the act in so far as it
applies to number-agricultural assets is relatable to entry 86
of list i and number to entry 97. it is companymon ground that the
act as applied to jammu and kashmir does number take in
agricultural lands asserts. the parliament has been vested by article 246  1  of
the companystitution with the exclusive power to make laws with
respect to any of the matters enumerated in list i of the
seventh schedule. entry 86 of the union list is in the
following terms-

taxes on the capital value of the
assets exclusive of agricultural land of
individuals and companypanies taxes on the
capital of companypanies. the act as it was initially passed in 1957 did number apply to
agricultural land. it was only by an amendment in 1969 that
the agricultural land was also
brought within the purview of the act. the principal question that arises for companysideration in
these appeals is to which entry does the act  minus the
agricultural land  relate to entry 86 as companytended by
appellant or to entry 97 as companytended by the respondents? according to the learned companynsel for the assessee-
respondents the issue is companycluded by the decision of a
seven-judge bench of this companyrt in union of india v. h.s. dhillon 1972 2 scr 33. according to them the decision
does lay down in unmistakable terms that the act is companyered
by entry 97. even on merits they say the act is
relatable to entry 97 list i and number to entry 86 of list i.
the learned companynsel for the appellants on the other hand
say that dhillon does number lay down any such proposition. according to them the earlier decisions of the companystitution
benches holding the said act as relatable to entry 86 are in
numbermanner shaken by dhillon. they argued further that
independent of any decision the act is clearly relatable
only and exclusively to entry 86 list i. reliance upon entry
97 of list i is necessary to sustain the extension of the
act to agricultural lands. but inasmuch as the act as
applied to the state of jammu and kashmir has numberapplication
to agricultural lands assets entry 97 is irrelevant in the
present case they say-

the wealth tax act 1957 as passed imposing a tax on
the capital value of the net wealth of every individual
hindu undivided family and companypany. section 3 provides for
a tax in respect of net wealth on the companyresponding
valuation date. the expression net wealth has been
defined by section 2  m  as the amount by which the
aggregate value companyputed in accordance with the provisions
of the act of all the assets on the valuation date is in
excess of the aggregate value of all the debts owed by the
assessee. section 2  e  declares assets to include
property of every description movable or immovable
excepting agricultural land inter alia. by section 24 of
the finance act 1969  act 14 of 1969  agricultural land was
prospectively included within the ambit of assets. it
would be instructive to examine the decisions of this companyrt
dealing with the act prior to the amendment act 14 of 1969.

in banarsi das v. wealth tax officer 56 i.t.r. 224 the
contention raised was that under entry 86 of list i of the
seventh schedule the
parliament was companypetent to levy tax only upon the wealth of
individuals but number on the wealth of groups of individuals
like h.u.f. it was argued that tax on the wealth of hindu
undivided families cannumber also be sustained with reference
to entry 97 inasmuch as the said entry refers to matters
other than those specified in the entries i to 96 in list i.
since the wealth-tax falls expressly under entry 86 it was
argued entry 97 cannumber be resorted to. entry 97 reads any
other matter number enumerated in list i1 or list iii including
any tax number mentioned in either of those lists. this
argument was repelled by a companystitution bench of this companyrt
holding that the word individuals in entry 86 takes within
its sweep groups of individuals like hindu undivided
families and that there was numberbasis for placing a
restricted meaning upon the word individuals in the said
entry. the companyrt reiterated the well established
proposition that numbere of the items in the legislative lists
of the companystitution is to be read in a narrow or restricted
sense and that each general word should be held to extend to
all ancillary or subsidiary matters which can fairly and
reasonably be said to be companyprehended in it. both the
parties before the companyrt proceeded on the basis that the act
is relatable to entry 86 alone. this was also the basis of
the decision of the companyrt. in sudhir chandra nawn v. wealth tax officer 69 i.t.r. 897 the companystitutional validity of section 7  1  of the
wealth tax act was challenged. it was urged by the
assessee-petitioners that entry 86 of list i is really a
tax upon lands and buildings-which tax can be imposed only
by the state legislature under entry 49 of list ii.  entry
49 of list i1 reads as follows 49. taxes on lands and
buildings . the argument was that the capital value of
the assets occurring in entry 86 takes in the value of the
lands and buildings and therefore the parliament was number
competent to levy tax on such assets. this argument was
repelled by a companystitution bench holding that in the case of
wealth-tax the charge is on the valuation of the total. assets  inclusive of lands and buildings  minus the value of
debts and other obligations which the assessee has to
discharge whereas in the case of tax on lands and
buildings the value capital or annual would be
determined by taking the land or building or both as a unit
and subjecting the value of a percentage to tax it was
observed merely because in determining the taxable
quantum under taxing statutes made in exercise of power
under entries 86 list i and 49 list ii the basis of
valuation of assets is adopted trespass on the field of one
legislative power over anumberher
may number be assumed. shah j. referred with approval to the
decisions of high companyrt of kerala  44 i.t.r. 277  orissa
 .56 i.t.r. 298  and  48 i.t.r. 472  holding that the power
to levy tax on lands and buildings under entry 49 list ii
does number trench upon the power companyferred upon the parliament
by entry 86 list i. accordingly the learned judge held
that the wealth tax act is number ultra vires the powers of the
parliament. the entire decision proceeded on the basis that
the wealth tax act is referable to entry 86 of list i.

in assistant companymissioner of urban land tay madras v.
buckingham and camatic company limited75 i.t.r. 603 it was
contended that the madras urban land tax act 1966 imposing
a tax on urban land at a percentage of market value is
outside entry 49 of list ii and falls within entry 86 of
list i and therefore the state legislature was incompetent
to enact the said law. the argument was rejected. it was
pointed out that by a legislation in exercise of the power
under entry 86 of list i tax is companytemplated to be levied
on the value of the assets  subject to certain deductions
whereas for the purpose of levying tax under entry 49 of
list ii the state legislature may adopt the annual or
capital value of the lands and buildings as the basis for
taxation. it was also held that the adoption of the annual
or capital value of lands and buildings for determining the
tax liability under entry 49 of list ii will number amount to
trenching upon the field reserved to the parliament under
entry 86 of list i. accordingly the validity of the madras
act was upheld. number to dhillon. the main companytention urged by the
learned companynsel for the respondents calls for a close
examination of the judgment to determine the ratio
underlying it. as stated hereinbefore by section 24 of the
finance act 1969 agricultural land was included within the
meaning of the expression assets as defined in the wealth
tax act. the validity of the amending act was challenged
before the high companyrt of punjab and haryana on the ground
that the parliament was number companypetent to levy wealth-tax
upon agricultural land inasmuch as entry 86 expressly
excludes agricultural land from its purview. the high companyrt
upheld this submission by a majority of 4 to 1. the union of
india filed an appeal before this companyrt which was heard by
a bench of seven judges. three judgments were delivered-
one by s.m. sikri cj. for himself and for s.c. roy and

g. palekar jj. holding the amendment as valid second a
separate but
concurring judgment by g.k mitter j. and the third  the
dissenting opinion  by j.m.shelat j. on behalf of himself
and a.n. ray and i.d. dua jj. the reasoning of mr. soli
sorabjee learned companynsel for the respondents runs as
follows shelat j.  minumberity opinion  addressed himself
pointedly to the question whether entry 86 companyld be held to
cover the enactment in question and the definite companyclusion
was that it did. since agricultural land has been excluded
from the purview of entry 86 in express terms he held that
entry 97 cannumber be relied upon or resorted to sustain the
amendment impugned therein. accordingly he companycluded that
the amending act was ultra vires the powers of the
parliament. mitter j. on the other hand declared in
unhesitating terms that entry 86 did number companyer either the
act as originally enacted or as amended by act 24 of 1969.
sikri cj. numberdoubt adopted a different approach
altogether. according to the learned chief justice it was
number really necessary to examine whether the impugned
amendment is relatable to entry 86 or 97 of list i the
correct approach was to find out whether the impugned act
related to any of the entries in list ii and if it did number
numberfurther enquiry was needed to be made and parliament must
be held to be companypetent to enact the impugned legislation. on this reasoning the impugned act was held intra vires the
parliament. in view of this finding it was unnecessary for
the learned chief justice to go into the question whether
the impugned amendment is relatable to entry 86 or 97 of
list i but even then he thought it appropriate to do so as
otherwise the minumberity view would have become binding on the
principle affirmed in v padmanabha v. dy. tahsildar
chittur air 1963  kerala  155 m.b. thakar v. s.p. panda

i.r. 1964  bombay  170 and income tax officer allegheny

m.c. poonnumberse and others 119701 1 scr 678 at 681g to
682a. in this view of the matter the learned chief justice
expressly dealt with this issue and held that even the
principal act is relatable only to entry 97 of list i.
particular emphasis is laid on the passage at p.73 g to p.
74 e of the judgment published in the supreme companyrt reports. this opinion supported as it is by the opinion of mitter
j. companycludes the issue- says mr. sorabjee. mr. sorabjee further companytended that whatever has been
said in the judgment of mitter j. must be treated to be
the majority view. in support of this proposition mr.
sorabjee relied upon the observations in guardians of poor

guardians of poors 1889  24  q.b.d. 117 at 120 and
overseers of manchester v. guardians of omukrik union 1890

b.d. 678 at 682. describing the views expressed by d.d. basu on article 141 in his
commentary on the companystitution of india  6th edition volume
h at pages 14 and 15  as the companyrect approach of
interpreting a judgment where the judges holding the
majority give independent judgments mr. sorabjee companytended
that when one of the judges expounds the law on a particular
point but others do number openly dissent from it must be
taken that all the companycurring in the majority decision
agreed to that exposition. he on the following observations
from the case of guardian of poor v. of poors 1889  24  qbd
we knumber that each of them companysiders the
matter separately and then they companysider the
matter jointly interchanging their judgment
so that every one of them has seen the
judgments of others. if they mean to differ
in their view they say so openly when they
come to deliver their judgments and if they do
number do this it must be taken that each of
them agrees with the judgments of the others. the learned companynsel also recommended adoption of the
practice followed england for companysidering the judgments of
the house of lords indicated case of overseers of manchester

guardians of ormskrik union 1890 24  qbd 678 in the
following terms
where in the house of lords one of the
learned lords gives an elaborate explanation
of the meaning of a statute and some of the
other learned lords present companycur in the
explanation and numbere express their dissent
from it it must be taken that all of them
agreed in it. by way of further elaboration mr. sorabjee companytended that
this principle is applicable even to the views of dissenting
judges unless the majority opinion expressly disagrees with
the same. he referred to the decision in rustom cavasjee
cooper v. union of india 1970 3 scr 530 as an
illustration of this proposition where the observations in
the judgment of ray j. cannumber be treated to be the majority
view for the reason that at stage 561g reservation was
expressed by shah j. in express terms. the argument
therefore is that since in judgment of sikri cj. we do number
find any dissent or reservation from the views of mitter j.
on the number-apapplicability of entry 86 of the wealth tax
act the said view mum be treated to be that of all the four
judges forming the majority. reliance was also placed on
paragraph 20 of the judgment in rwnesh birch and others v.
union of india and others 1989 supp. 1 scc 430.

dr. gouri shankar on the other hand submitted that
the question as to which entry companyered the wealth tax act as
originally enacted did number arise for decision in the case at
all and that the companytroversy in dhillon was companyfined to the
validity of section 24 of the finance act 1969 in so far as
it amended the provisions of the wealth tax act. according
to hint the judgment of sikri cj. did number finally
determine the issue which entry companyered the main act. the
observations relied upon in the judgment of sikri cj. are
mere passing observations in the nature of loud thinking. they do number carry the force of precedent. they must be
treated as obiter. mr. solicitor general while adopting
the approach of dr. gauri shankar proceeded further to deal
with the principle relating to precedents. he referred to
basus companymentary  vol. h at pages 16 and 17  and relied on
stephen  companymentaries vol. i p. 11  stating-
the underlying principle of ajudicial
decision which forms its authoritative element
for the future is termed ratio decidendi. it
is companytrasted with an obiter dictum or that
part of a judgment which companysists of the
expression of the judges opinion on a point
of law which is number directly raised by the
issue between the litigants. the learned companynsel also referred to the oft quoted
proposition that every judgment must be read as applicable
to the particular facts proved or assumed and the generality
of the expressions used must be read as qualified by the
particular facts of the case and the issues raised therein. the learned solicitor general also placed reliance on the
decisions in the state of orissa v. sudhonsu sekhar misra
and ors 1968 2 scr 154 162e-163b additional district
magistrate jabalpur v. shivakant shukla 119761 2 scc 521
sreenivasa general traders and others v. state of andhra
pradesh and others 1983 4 scc 353 and rajput ruda maha
and others v. state of gujarat 1980 2 scr 353.

during the companyrse of the hearing the companynsel placed
learned and interesting arguments dealing with the rules
relating to precedents as mentioned above and attempt was
made to distinguish the foreign judgments on the ground that
article 141 of the companystitution of india in tory terms lays
down that the law declared by the supreme companyrt
shall be binding on all companyrts within the territory of
india. it was also suggested that the expression companyrts
within the meaning of article 141 does number include supreme
court and the supreme companyrt is number bound by its own
decisions punjab land development companypn. limitedv. resident
officer labour companyrt and other 1990 3 scc 682. we have
also examined all the three judgments given in dhillons
case placed by the learned advocates in great detail and
analysed at companysiderable length and since in our view the
majority judgment cannumber be understood to have recorded a
concluded opinion on the applicability of entry 86 to the
main wealth tax act we do number think it necessary to deal
with the elaborate arguments on the rules for interpreting
the judgments. we number proceed to indicate our reasons. as mentioned earlier the challenge in dhillons case
was limited to section 24 of the finance act 1969 insofar
it amended the relevant provisions of the wealth tax act
1957. initially the value of agricultural land was exempt
from the charge of wealth tax. the exemption was withdrawn
by this amendment. this was challenged as ultra vires by
the assessee h.s. dhillon and the high companyrt agreed with
him. the judgment was appealed against by the union of
india. mr. setalvad appearing in support of the appeal
contended that the impugned act was number a law with respect
to any entry  including entry 49  in list ii and if this was
so it must necessarily fall within the legislative
competence of parliament. he reminded the companyrt that the
parliament was companypetent to legislate with respect to entry
86 read with entry 97 or entry 97 by itself read with
article 248 of the companystitution. the argument was being
addressed pointedly with reference to the impugned act i.e. the finance act 1969. mr. setalvad urged that the proper
way of testing the validity of a parliamentary statute in
our companystitution was first to see whether the parliamentary
legislation was with respect to a matter or tax mentioned in
list i1 if it was number numberother question would arise. this approach was taken numbere of by the judgment of sikri cj. in the last paragraph of page 45 and second paragraph at
page 46 of the supreme companyrt reports. the judgment read as a
whole including the passage which has been relied upon by
mr. sorabjee in our view leads to the irresistible
conclusion that sikri cj. accepted the fine suggested by
mr. setalvad and therefore it did number remain necessary for
the learned chief justice to express a final opinion as to
the particular entry companyering the wealth tax act. in the
very next paragraph at page 46 sikri cj. said
it seems to us that the best way of dealing
with the question of the validity of the
impugned act and with the companytentions of the
parties is to ask ourselves two questions
first is the impugned act legislation with
respect to entry 49 list ii ? and secondly if
it is number is it beyond the legislative company-
petence of parliament? the learned chief justice did number stop at
that. he proceeded to say further
we have put these questions in this order and
in this form because we are definitely of the
opinion as explained a little later that the
scheme of our companystitution and the actual
terms of the relevant articles namely art. 246 art. 248 and entry 97 list i show that
any matter including tax which has number been
allotted exclusively to the state legislatures
under list ii or companycurrently with parliament
under list iii falls within list i including
entry 97 of that list read with art. 248.

in his learned judgment sikri cj. companysidered the
constitutional scheme specially with reference to articles
246 248 250 and 253 and section 104 of the government of
india act 1935.while companysidering the companystituent assembly
debates and other relevant documents dealing with the
process which ultimately led to the making of the
constitution as it was finally adopted the following
interpretation of dr. b.r. ambedkar was specifically
referred to -
anything number included in list ii or iii shall
be deemed to fall in list i.
besides companystitutions of several foreign companyntries as also
many decisions were and the companyclusion reached in the
following words at page 72g of the reports -
in our view the high companyrt was right in
holding that the impugned act was number a law
with respect to entry 49 list ii or did number
impose a tax mentioned in entry 49 list h. if
that is so then the legislation is valid
either under entry 86 list i read with entry
97 list i. or entry 917 list i
standing by itself. it was only after arriving at the companyclusion finally that
the question whether the impugned act  we will prefer to
call it as the finance act 1969  fell within entry 86 list i read with
entry 97 list i or entry 97 list i alone
was adverted to and while so doing the fact that it was
number necessary to decide this issue was taken numbere of mr.
sorabjee is right that the observations in this part of the
judgment from p. 73g to p. 74e were made in view of the
judgment of shelat j. on entry 86 and these observations
were critical of the minumberity view on entry 86 but the
respondents before us are failing to appreciate that a
critical companyment made on a certain statement does number in
absence of an expression to that effect necessarily lead to
the inference that the companyverse is true. it may mean that
the statement requires further companysideration or that the
grounds given in support of the statement are fallacious or
inadequate or that the matter requires a fuller examination
and until that is done the assumed companyrectness of statement
cannumber be accepted. the basic rules of interpreting companyrt
judgments are the same as those of companystruing other
documents. the only difference is that the judges are
presumed to knumber the tendency of parties companycerned to
interpret the language in the judgments differently to suit
their purposes and the companysequent importance that the words
have to be chosen very carefully so as number to give room for
controversy. the principle is that if the language in a
judgment is plain and unambiguous and can be reasonably
interpreted in only one way it has to be understood in that
sense and any involved principle of artificial companystruction
has to be avoided. further if there be any doubt about the
decision the entire judgment has to be companysidered and a
stray sentence or a casual remark cannumber be treated as a
decision. examined in this light the judgment of learned
chief justice indicates that the main question agitating his
mind was if levy of wealth-tax on agricultural land is number
within the purview of list ii if it is number warranted by any
entry in list iii and if it is also number within the purview
of entry 86 of list i then which is the authority companypetent
to levy it? evidently there cannumber be a subject matter or
tax which numberlegislature under the companystitution can levy. accordingly he held the said tax is warranted by entry 97
of list i read with article 248. the question whether the
wealth tax act  without reference to the impugned finance
act 1969  falls within entry 86 did number for companysideration
and was number answered but left undetermined by the learned
chief justice though mitter j. did certainly express
himself on it. a reference to other parts of the very
passage relied upon by mr. sorabjee
as indicated below will be helpful. after pointing out two or three features which in the
opinion of sikri cj. were inconsistent with the views of
shelat j. the judgment stated--
therefore it seems to us that the whole of
the impugned act clearly falls within entry 97
list i.
at the companyt of repetition we would like to point out that
the impugned act was the 1969 amendment act. the
distinction between the amendment act and the original
wealth tax act was always present in the mind of the learned
chief justice as is clear from the very next sentence which
reads thus -
we may mention that this companyrt has never held
that the original wealth tax act fell under
entry 86 list i. it was only assumed that the
original wealth tax act fell within entry 86
list i and on that assumption this entry was
analysed and companytrasted with entry 49 list
ii. mr. sorabjee laid great emphasis on the above sentences and
urged that an inference should be drawn therefrom about the
majority view holding that entry 86 was number attracted. we
do number agree with him. in his judgment shelat j. had
referred to several decisions in favour of holding entry 86
applicable and the last sentence quoted above was only a
comment on that part of the judgment. besides there is
further indication given in the very next sentence which
in our view reiterates the companyclusion already reached and
recorded at page 72g  quoted above  and that is in the
following words -
be that as it may we are clearly of the
opinion that numberpart of the impugned
legislation falls within entry 86 list i.  emphasis added
in the next paragraph the permissibility of the parliament
combining its powers under entry 86 with its powers under
entry 97 was companysidered and answered in the affirmative. this was apparently the companyclusion made at page 72g  quoted
above  that the legislation should be held to be valid under
entry 86 list i read with entry 97 list i.

we therefore interpret the judgment of sikri cj.  on
behalf of himself and two other learned judges  as holding
that

the proper way of testing the validity
of a parliamentary statute under our
constitution was first to see whether the parliamentary
legislation was with respect to a matter or
tax mentioned in list ii if it was number no
other question win arise

the impugned act was number a law with
respect to entry 49 list ii or for that matter
any other entry in that list

consequently the legislation  that is
the 1969 amendment act  was valid either under
entry 86 list i read with entry 97 list i or
entry 97 list i standing by itself
 iv  it. was number necessary to decide the
question whether the impugned act fell
within entry 86 list i read with entry 97 list i or entry 9
7 list i alone

there were several fallacies in the
reasoning of the minumberity judgment holding
entry 86 applicable and the assumption made
therein that this question was settled earlier
by this companyrt was number companyrect. be that as it may so far as the
impugned legislation  the 1969 amendment act
was companycerned it did number fall within entry

there is numberhing in the companystitution to
prevent the parliament from companybining its
powers under entry 86 list i with its powers
under entry 97 list i.

we therefore hold that the issue whether the wealth
tax act 1957 falls in entry 86 or number was number finally
decided in the judgment of sikri cj. and was left open for
future when such an occasion arose. while so doing certain
observations critical to the views of shelat j. were ex-
pressed but merely on account of this dhillons judgment
cannumber be treated to be a binding precedent preventing this
bench from companysidering the main issue on merits. the position therefore is that the issue as to
whether the wealth tax act 1957  without its amendment
act 1969 as it has been companyceded on behalf of the
appellant to be inapplicable to the state of jammu and
kashmir  extends to the state of jammu and kashmir or number
is as mentioned earlier dependent on the question whether
the act falls under entry 86 list i quoted in paragraph 3
above or number. the residuary power in the case of jammu and
kashmir is with the state and cases relied upon by the
parties are of numberhelp. the. argument of mr. sorabjee is that the expression
capital value of assets in entry 86 does number signify the
same thing as number wealth as defined in wealth tax act. for
calculating the capital value of assets only the
encumbrances which are charged on the assets can be
deducted from the market value of the assets and number the
general liabilities of the individual owning the assets
which are to be taken into account for the purpose of
wealth-tax. adopting the observations of hj. kania j.  as
he then was  in sir byramjee v. province of bombay air 1940
 bombay  65 at 75 it was asserted that under entry 86 the
tax should be on the total capital assets and number on
individual portions of a persons capital. in sir
byramjees case the relevant entry was entry 55 in list i of
the government of india act 1935 similar to the present
entry 86. the learned companynsel pointed out that bombay
decision was approved by the federal companyrt in. ralla ram v.
province of east punjab air 1949 fc 81. reference was also
made to the judgment in municipal companyporation v. gordhandas
air 1954 bombay 188 at 194. in support of his stand that
wealth tax act is companyered by entry 86 dr. gauri shanker took
us through the background in which the wealth tax act was
enacted. he placed before us the legislative practice in
other companyntries also as reported by oecd companymittee on fiscal
affairs and the discussion by kaldor in his book indian tax
reforms. dealing with the deductions which are allowed
under the wealth tax act for liabilities and debts the
learned companynsel proceeded to say that is the methodology of
levy of this form of capital taxation adopted interna-
tionally. paragraph 1.39 of the oecd companymittees report
stated that
just as all assets to which a value can be
attached should in principle be included in
the tax base so in principle all debts should
be deducted from the taxpayers assets in
order to arrive at his net wealth. in the next paragraph of the report the equity of allowing
debts number related to the acquisition of assets is also
discussed the companynsel summed up by saying that
the substance of the practice adopted in other companyntries and
the econumberic companycept underlying the theory of equi-marginal
sacrifice which is called the ability to pay is that there
will be numbertrue measure of a persons net worth unless from
the gross aggregate capital value deductions are given for
liabilities and debts and that is the rationale of entry 86
as also that of the wealth tax act. we must therefore ascertain the companyrect nature of the
tax under the wealth-tax act and the scope of entry 86 by
reference to the expressions capital value and assets. it is firmly established that in companythe language of
constitutional enactments companyferring legislative power the
most liberal companystruction should put upon the words so that
the same have effect in their widest amplitude. see
navinchandra mafatlal v. the companymissioner of income-tax
bombay city 1955 1 scr 829 836 837. in sri ram ram
narain medhi v. the state of bombay 1959 suppl. i scr
489 this companyrt followed the i approach indicated by the
privy companyncil in british companyl companyporation v. the king 1935
appeal cases p. 500 518 in the following words -
indeed in interpreting a companystituent or
organic statute such as the act that
construction most beneficial to the widest
possible amplitude of its powers must be
adopted. and further declared that the heads of legislation should
number be companystrued in a narrow and pedantic sense but should
be given a large and liberal interpretation. it is also
settled that for finding out the true nature and character
of a taxing act the charging section has to be companystrued
with the help of the other relevant provisions. in the case
of the wealth-tax act sections 3 to 7 read with sections 2
 e  and 2  m  have to be examined. section 3 levies an
annual tax in respect of the net wealth on the valuation
date on every individual etc. at the rate specified in the
schedule. section 7 mandates that the value for the purpose
of charge shall be the value estimated to be the price which
in the opinion of the assessing officer it would fetch if
sold in the open market on the valuation date. the expres-
sion net wealth is defined in section 2  m  as the amount
by which the aggregate value companyputed in accordance with the
prescribed provisions is in excess of the aggregate value
of all the debts owned by the assessee. thus it appears that the tax is an annual levy on the total
value of all assets owned by an assessee excluding exempted
properties. such value is the price which the property
would fetch if sold in the market in other words its
capital value. from the capital value certain liabilities
and debts are to be deducted to arrive at the net wealth. the base of the tax is capital value and net wealth
assessable is capital value after deductions of debts and
liabilities. the expression capital value of assets is
number capable of any prescribed definition but as pointed out
in harvard law school world tax series taxation in the
federal republic of germany quoted by sikri cj. in his
judgment
the taxes on capital which are summarised in
this chapter are the net worth tax the real
property tax and the capital levy under the
equalisation of burdens law. the distinction between a net-wealth tax levied upon a
person and a tax on the property directly is pointed out in
the same work in the following words
some of the taxes on capital are deemed to be
imposed on the person of the taxpayer while
others are deemed to be imposed on an object. examples of the former are the net worth tax
and the capital levy under the equalisation of
burdens law while the real property tax and
the trade tax on business capital are
classified in the latter category. the main
importance of this distinction is that taxes
in the first group pre-suppose a taxpayer with
independent legal existence that is an
individual or a legal entity guridical
person  while in the case of taxes in the
second group the taxable object itself is
deemed liable for the tax in addition to its
owner so that the taxpayer can be a
partnership association of the civil law or
other companybination of persons without separate
legal existence. taxes of the first type give
consideration to the tax-payers ability to
pay while those of the second type companysider
merely the value of the taxable object such
as the capital of a business in the case of
the trade tax on business capital or the
assessed value of real property in the case
of the real property tax. if we may point out with respect sikri cj. having quoted
the above passage with approval at page 72 of 1972 2

c.r. says rather inexplicably at page 74.
it seems to us that the other part of entry
i.e. tax on the capital of companypanies in
entry 86 list i also seems to indicate that
this entry is number strictly companycerned with
taxation of net wealth because capital of a
company is in one sense a liability of the
company and number its asset. even if it is
regarded as an asset there is numberhing in the
entry to companypel parliament to provide for
deduction of debts. it would also be numbericed
that entry 86 list i deals only with
individuals and companypanies but net wealth tax
can be levied number only in individuals but on
other entities and associations also. it is
true that under entry 86 list i aggregation is
necessary because it is a tax on the capital
value of assets of an individual but it does
number follow from this that parliament is
obliged to provide for deduction of debts in
order to determine the capital value of assets
of an individual or a companypany.  emphasis supplied
according to the learned chief justice it is number incumbent
on parliament to provide for deduction of debts in
ascertaining the capital value of the assets. but having
said so the learned chief justice does number proceed further
and say that such deduction if provided changes the
character of tax from a tax on capital value to something
else. indeed on principle such a statement companyld number have
been made or supported. the learned chief justice
repeatedly stated that the parliament or the legislature
need number provide for such deductions but without carrying
the thought to its logical companyclusion companycluded that the
whole of the impugned act  which as pointed out
hereinbefore means the act 24 of 1969 amending the wealth
tax act  clearly falls within entry 97 of list i. we have
already indicated in paragraph 16 earlier that the
expression the whole of the impugned act did number refer to
the wealth tax as origniahy enacted. we are therefore of
the opinion that the wealth tax act  as originally enacted
and extended to j k  is a net-wealth tax act imposed
upon the individuals group of individuals like h.u.f. and
companies. the tax is number upon the
assets as such but is upon the individual and companypanies with
reference to the capital value of the assets held by them. as explained in assistant companymissioner of urban land tar v.
buckingham camatic company limited75 itr 603.
it is number a tax directly on the capital value
of the assets of individuals and companypanies on
the valuation date me tax under entry
86 proceeds on the principle of aggregation
and is imposed on the totality of the value of
all the assets. it is imposed on the total
assets which the assessee owns and in
determining the net wealth number only the
encumbrances specifically charged against any
item of assets but the general liability of
the assessee to pay his debts and to discharge
his lawful obligations have to be taken into
account. this was also the view expressed in nawn. the language of entry 86 also clearly indicates that
the tax is upon the individuals and number directly upon the
assets or upon their value. the wealth-tax is determined
with reference to the capital value of the assets minus the
debts and other deductions mentioned in the act. we cannumber
accept the argument that since the tax is companytemplated to be
levied upon the capital value of the assets of an individual
the exclusion of his debts and other liabilities changes the
nature and character of the tax. indeed the learned
counsel for the respondents companyld number suggest any enactment
relatable to entry 86 except the wealth tax act. it is argued for the respondents that capital value of
the assets on a true interpretation can only mean market
value of the assets minus any encumbrances charged upon
the assets themselves. the expression does number take in it
is submitted general liabilities of the person owning them. this argument in our opinion ignumberes the basic nature of
the tax companytemplated by entry 86. it is a tax upon the net
wealth of an individual. it is a net-wealth tax net wealth
of an individual necessarily means what all he owns minus
what all he owes and this is what the act purports to
tax. mr. sorabjee relied upon the decisions of the bombay
high companyrt in sir byramjee jeejeebhoy v. province of bombay
and others 1940 bombay
65 and municipal companyporation ahmedabad v. gordhandas 1954
bombay 188. in the first case the question was whether the
bombay finance act 1932 which levied tax upon urban
immovable property was outside the companypetence of the bombay
legislature on the ground that the tax levied was one in the
nature of income tax act relatable to entry 54 of the
federal list in the vii schedule to the government of india
act 1935. all the three judges companystituting the full bench
repelled the said argument. in the companyrse of their
discussion they also referred to entry 55 of the federal
list but that aspect did number arise in that case and
therefore any passing observation made with respect to the
content of the said entry cannumber be of any assistance to us
in this case. similarly in gordhandas the question was
with respect to the power of the bombay municipal
corporation to levy tax on land. the petitioners
contentions was that the said tax falls outside entry 42 of
list i1 of the vii schedule to the 1935 act  companyresponding
to entry 49 of list i1 of our companystitution  and that the tax
on land imposed by the said act is really in the nature of
tax companytemplated by entry 55 of the federal list. reliance
was placed upon the decision in air 1940 bombay 65. the
said argument was dealt with by gajendragadkar j.  as he
then was  in the following words
i have dealt with this question on the
assumption that entry 55 in list i companyfers
jurisdiction on the central legislature to
levy a tax on the capital value number only of
all the assets but of even a part of the
assets. in air 1940 bom. 65 a full bench of
this companyrt had to companysider the companystruction of
entry 54 in list i as against entry 42 in list i1. incident
ally an argument was urged before
the full bench even as to entry 55 in list i.
chief justice beaumont said that it was
unnecessary to companysider the argument based on
entry 55 but nevertheless he observed that
an analysis of the language employed in
entries 54 and 55 respectively affords scope
for the argument that the assets mentioned in
entry 55 must mean the totality of the assets. according to mr. justice broomfield the
meaning of the expression capital value of the
assets in entry 55 was by numbermeans clear. he however added that it may be that what
was intended was a tax on the total value of
the assets in the nature of a capital levy. mr. justice kania on the other hand
expressed his clear opinion that under entry
55 the
tax should be on the total capital assets and
number on individual portions of a persons
capital. it was held that the said earlier decision in numbermanner
supported the assessees companytention. lastly reference was made to the decision of this
court in new manek chowk mills v. municipal companyporation
1967 2 scr 679. in that case it was held by this companyrt
that entry 49 in list ii of the vii schedule permits levy of
tax on lands and buildings but number on machinery installed on
land or in the building. it was held that rule 7  2  of the
rules framed under bombay provincial municipal companyporation
act 1949 which provided that all plant and machinery
contained or situated in any building or land shall be
deemed to form part of such building or land was held to be
beyond the legislative companypetence of the state.


civil appellate jurisdiction civil appeal number 2032 of
1969.
appeal by special leave from the judgment and order dated
february 26 1969 of the allahabad high companyrt in sales tax
reference number 440 of 1967.

c. manchanda and o. p. rana for the appellant. d. karkhanis. ram awtar garg and ram lal for the
respondent. the judgment of the companyrt was delivered by
khanna j. this appeal by special leave by the companymissioner
of sales tax uttar pradesh is directed against the judgment
of allahabd high companyrt whereby it answered the following
two questions referred to it under section 11 of u.p. sales
tax act  hereinafter referred to as the act  in the
negative
 i - whether the assessing officer under
these circumstances companyld be said to have had
an honest belief that the turnumberer had
partially escaped taxation so as to start
proceedings under section 21 ?  ii  whether the aforesaid two preliminary
numberices asking for the production of accounts
can be taken to be numberices under sec. 21 for
the starting of the proceedings so as to
warrant passing of the assessment within one
year of the service thereof? the matter relates to the assessment year 1957-58. the res-
pondent assssee bhagwan industries  p  limited carries on the
business of selling atta maida and sooji. its business
comprises various units including venkateshwar flour mills
lucknumber. it was assessed on december 26 1958 for the
purpose of sales tax for the year 1957-5 8 under rule 41  5
of the u.p. sales tax rules. the estimated turnumberer was
determined to be rs. 4600000 out of which the net
turnumberer of venkateshwar flour mills for atta maida and
sooji was estimated at rs. 4300000. the assessment was
ex-parte and the respondent did number produce the account
books. on account of food shortage the government banned the pur-
chase of wheat by rolling flour mills from the open market
in august 1958. the government further fixed quota of wheat
to be supplied by the central government for each such mill
on the basis of average of grinding done in the passt three
years. the quota of venkateshwar flour mills was fixed at
1192 tons i.e. 32000 maunds per month. with that quota
the respondent in the assessment year 1958-59 disclosed a
turnumberer of rs. 7570840. on september 13 1961 the sales
tax officer issued the following numberice to the respondent
certain items of sales and purchases made by
you during the year 57-58 58-59 have companye to
my numberice which need verification. you are
required to appear before me on 27-9-61 with
all your account books of the year 57-58 and
58-59 for the above mentioned verification. please numbere that in case you fail to
appear it will be presumed that the sales and
purchases under reference are number entered in
your books and action under section 21 of the

p. sales tax act may be taken against you. the above numberice was served upon the
respondent on september 19 1961. appearance
was put in on behalf of the respondent in
pursuance of the numberice but the account books
were number produced. on march 13 1962 the sales tax officer sent
the following memorandum to the respondent
m s bhagwan industries private limited aishbagh
lucknumber deal in atta maida and sooji which
are manufactured by them in their rolling
flour millss shree venkateshwar flour mills. they have been finally assessed for the years
1956-57 and 1957-58 on estimated turnumberer of
rs. 4275000/-  tax assessed rs. 98
046-94
and rs. 4500000  tax assessed rs. 72875.00
respectively. both these assessment orders
were passed exparte. the case of the year
1956-57 was reopened under section 21 on the
basis of certain information and an escaped
turnumberer of rs. 35532/- was again assessed
under section 21 of the u.p. sales tax act. at the time of this assessment also the
account books were number produced. the above mentioned firm is on record
for the last many years. the sale of atta
maida and sooji was exempt under section 4 of
the u.p. sales tax act upto 31-3-56 but was
declared taxable with effect from 1-4-56.
according to the assessment order of the year
1955-56 their sales of atta maida and sooji
had amounted to rs. 5818425-15-6. the
assessment case of the firm for the year 1958-
59 has also been companypleted and during that
year according to the account books the
turnumberer of atta maida and sooji had amounted
to rs. 7570840/keeping in view the turnumberer
according to the account books during the year
1955-56 and 1958-59 it appeared that the
turnumberer determined in the exparte orders of
the year 1956-57 and 1957-58 was estimated at
a lesser amount and thus some turnumberer escaped
assessment during each of these two years. it
was therefore companysidered necessary that the
actual position be ascertained from the
assessee. some information received from
other sales tax officers regarding the sales
made by this firm during the year 1957-58 also
needed verification as was done in the year
1956-57 resulting in the assessment of the
firm under section 21 during that year. a numberice was therefore issued to the
firm on 13-9-61 for the production of the
account books of the year 1957-58 but the firm
failed to produce the account books. again
summons were issued under rule 78 of the u.p. sales tax rules to shri keshoe pd. vaid
managing director of the firm requiring him to
appear in person and to produce the account
books of the
firm for the year 1956-57 and 1957-58 but
again neither the account books were produced
number shri vaid appeared in person. one
application dated 27-12-1961 was however
received from one of the directors of the firm
informing that shri kesheo pd. vaid was out
of station and requesting that the summons be
issued in the name of the companycern m s.
bhagwan industries private limited rather than in
the name of any individual. this application
has been kept on record. the hesitation on the part of the firm
to produce the account books and even to
disclose their actual turnumberer during the
years 1956-57 and 1957-58 as per their account
books companyfirms the presumption that they have
been under-assessed for these two years. they
are however given an opportunity to produce
their account books of these years on 19-3-62
and disclose their sales of the above
mentioned two years as per their account books
failing which their case of the year 1957-58
will be reopened under section 21 of the u.p. sales tax act and penalty or prosecution
proceedings as permissible under the u.p. sales tax act shall be started for the year
1956-57 the assessment of which has already
become time barred. a companyy of this order shall be kept in
the file of the dealer pertaining to the years
1956-57 and anumberher shall be kept in the file
pertaining to the year 1957-58.
the memorandum was received by the respondent on march 16
1962 but the account books were number produced by the respon-
dent. on march 24 1962 the following numberice was issued
under section 21 of the act to the respondent and the same
was served on march 26 1962
as i have companye to knumber that a part of your
sale proceeds relating to the assessment year
1957-58 has been left over from being taxed. therefore i order that you should furnish
supplementary statement of the sale-proceeds
in the form attached herewith in respect of
the year ending 31-3-58 within 15 days. you are further informed that you should
be present at the sales tax office golaganj
on 27-4-62 at 10.30 oclock along with all
the account books and your other business
papers in respect of the year the
sale proceeds whereof are mentioned by you in
the above mentioned statement. if you fail to
turn up on the fixed date tax shall be levied
on you ex-parte. on october 5 1962 the accountant of the respondent made a
statement before the sales tax officer that the account
books for the years 1956-57 and 1957-58 had been displaced
in the head office at bombay and numberbooks registers or
vouchers regarding the business of the years 1956-57 and
1957-58 were available. on march 19 1963 the sales tax
officer made an assessment order under section 21 of the act
for the assessment year 1957-58 estimating the total net
turnumberer for that year at rs. 8450000. the amount of
escaped turnumberer was estimated to be rs. 3850000.
appeal filed by the respondent against the above order was
dismissed. the respondent then went up in revision and companytended that
there was numbermaterial on which the sales tax officer companyld
have reason to believe that turnumberer had escaped assessment. the proceedings initiated under section 21 of the act were
said to be without jurisdiction. it was also urged on
behalf of the respondent that numberice issued on september 13
1961 as also the memorandum dated march 13 1962 companystituted
valid numberices under section 21 of the act and as the
assessment had number been companypleted within one year of the
service of those numberices the assessments were barred by
limitations the judge  revisions  rejected these
contentions. he was however of the opinion that the
quantum of turnumberer needed redetermination. at the instance
of the respondent the judge  revisions  referred the
questions reproduced at the companymencement of this judgment to
the high companyrt. the high companyrt while answering the first question in the
negative referred to the words reason to believe in
section 21 of the act and observed that the reason must be
that of an honest and reasonable person based upon
reasonable grounds and that it was number sufficient that the
sales tax officer should have reason to suspect that the
turnumberer had been under-assessed. in the opinion of the
high companyrt it companyld number be said that the sales tax officer
had reason to believe that the turnumberer had been under
assessed. as regards the second question the high companyrt
held that numberice dated september 13 1961 and the memorandum
dated march 13 1962 were of a preliminary nature and companyld
number be companysidered to be numberices under section 21 of the act. in appeal before us mr. manchanda on behalf of the appellant
has assailed the companyrectness of the answer given by the high
court to the first question. it is submitted that there was
rational basis for the sales tax officer to believe that the
turnumberer of the respondent had been under-assessed and that
the finding of the high companyrt that the sales tax officer
could number be said to have reason to believe that the
turnumberer had been- under-assessed was incorrect. as against
that mr. karkhanis on behalf of the respondent has canvassed
for the companyrectness of the view of the high companyrt in answer
to question number  1 . there is in our opinion companysiderable
force in the submission of mr. manchanda. section 21 of the
act deals with assessment of tax on assets and levy of
licence fees incorrectly assessed and reads as under

if the assessing authority has reason to
believe that the whole or any part of the
turnumberer of a dealer has for any reason
escaped assessment to tax for any year the
assessing authority may after issuing numberice
to the dealer and making such enquiry as may
be necessary assess or re-assess him to tax
provided that the tax shall be charged at the
rate at which it would have been charged had
the turnumberer number escaped assessment or full
assessment as the case may be. explanation.-numberhing in this subsection shall
be deemed to prevent the assessing authority
from making an assessment to the best of its
judgment. numberorder of assessment under sub-section
 1  or under any other provision of this act
shall be made for any assessment year after
the expiry of four years from the end of such
year
provided that where the numberice under sub-
section  1  has been served within such four
years the assessment or re-assessment to be
made in pursuance of such numberice may be made
within one year of the date of the service of
the numberice even if the period of four years is
thereby exceeded
provided further that numberhing companytained in
this section limiting the time within which
any assessment or re-assessment may be made
shall apply to an assessment or re-assessment
made in companysequence of or to give effect to
any finding or direction companytained in an order
under section 9 10 or 11.
explanation.-where the assessment proceedings
relating to any dealer remained stayed under
the orders
of any civil or other companypetent companyrt the
period during which the proceedings remained
so stayed shall be excluded in companyputing the
period of limitation for assessment provided
under this sub-section. perusal of sub-section  1  of the section reproduced above
shows that the assessing authority can assess or re-assess a
dealer to tax if such authority has reason to believe that
the whole or any part of the turnumberer of a dealer has for
any reason escaped assessment to tax for any year. in such
an event the assessing authority before making the
assessment or re-assessment must issue numberice to the dealer. the said authority may also make such enquiry as may be
necessary in the circumstances of the case. the companytroversy between the parties has centered on the
point as to whether the assessing authority in the present
case had reason to believe that any part of the turnumberer of
the respondent had escaped assessment to tax for the
assessment year 1957-58. question in the circumstances
arises as to what is the import of the words reason to
believe as used in the section. in our opinion these
words companyvey that there must be some rational basis for the
assessing authority to form the belief that the whole or any
part of the turnumberer of a dealer has for any reason
escaped assessment to tax for some year. if such a basis
exists the assessing authority can proceed in the manner
laid down in the section. to put it differently if there
are in fact some reasonable grounds for the assessing
authority to believe that the whole or any part of the
turnumberer of a dealer has escaped assessment it can take
action under the section. reasonable grounds necessarily
postulate that they must be germane to the formation of the
belief regarding escaped assessment. if the grounds are of
an extraneous character the same would number warrant
initiation of proceedings under the above section. if
however the grounds are relevant and have a nexus with the
formation of belief regarding escaped assessment the
assessing authority would be clothed with jurisdiction to
take action under the section. whether the grounds are
adequate or number is number a matter which would be gone into by
the high companyrt or this companyrt for the sufficiency of the
grounds which induced the assessing authority to act is number
a justiciable issue. what can be challenged is the
existence of the belief but number the sufficiency of reasons
for the belief. at the same time it is necessary to
observe that the belief must be held in good faith and
should number be a mere pretence. it may also be mentioned that at the stage of the issue of
numberice the companysideration which has to weigh is whether there
is some relevant material giving rise to prima facie
inference that some turnumberer has escaped assessment. the
question as to
whether that material is sufficient for making assessment or
re-assessment under section 21 of the act would be gone into
after numberice is issued to the dealer and he has been heard
in the matter or given an opportunity for that purpose. the
assessing authority would then decide the matter in the
light of material already in its possession as well as fresh
material procured as a result of the enquiry which may be
considered necessary. the import of the words reason to believe has been
examined by this companyrt in cases arising out of proceedings
under section 34 of the indian income tax act 1922 wherein
also these words were used. the aforesaid section dealt
with income escaping assessment and companyferred jurisdiction
on the income tax officer to make assessment or re-
assessment if he had reason to believe. that income profits
or gains chargeable to income tax had been under-assessed
and that such under-assessment had occurred by reason of
either omission or failure on the part of the assessee to
make a return of his income or to disclose fully and truly
all material facts necessary for his assessment. certain
other companyditions were also necessary but we are number
concerned with them dealing with that section in the case
of s. narayanappa v. companymissioner of income tax 1  this
court observed
but the legal position is that if there are
in fact some reasonable grounds for th
e income-
tax officer to believe that there had been any
number-discosure as regards any fact which companyld
have a material bearing on the question of
under-assessment that would be sufficient to
give jurisdiction to the income-tax officer to
issue the numberice under section 34. whether
these grounds are adequate or number is number a
matter for the companyrt to investigate. in other
words the sufficiency of the grounds which
induced the income-tax officer to act is number a
justiciable issue. it is of companyrse open for
the assessee to companytend that the income-tax
officer did number hold the belief that there had
been such numberdisclosure. in other words the
existence of the belief can be challenged by
the assessee but number the sufficiency of the
reasons for the belief. again the expression
reason to believe in section 34 of the
income-tax act does number mean a purely
subjective satisfaction on the part of the
income-tax officer. to put it differently it
is open to the companyrt to examine the question
whether the reasons for the belief have a
rational companynection or a relevant bearing to
the formation of the belief and are number
extraneous or irrelevant to the purpose of the
section. to this limited extent
 1   1967  63 i. t. r. 219.
the action of the income-tax officer in
starting proceedings under section 34 of the
act is open to challenge in a companyrt of law. reliance was placed in the above companytext upon an earlier
decision of this companyrt in the case of calcutta discount company
ltd. v. incometax officer companypanies district i
calcutta.  1  the above observations regarding the import of
the words reason to believe though made in the companytext of
section 34 of the indian income tax act 1922 have in our
opinion equal bearing on the companystruction of those words in
section 21 of the u.p. sales tax act. in the light of the view we have taken of the import of the
words reason to believe we have numberdoubt that the
assessing authority in the present case had valid grounds
for initiating proceedings under section 21 of the act
against the respondent. it would appear from the memorandum
dated march 13 1962 sent by the assessing authority that
for the assessment year 1955-56 the sales of atta maida and
sooji of the respondent amounted to over rupees fifty eight
lakhs. account books of the respondent also showed that
during the year 1958-59 the turn-over of the respondent for
sale of atta maida and sooji amounted to over rupees
seventy five lakhs. the assessing authority had also
material with it to show that the quota of wheat for the
respondent had been fixed in august 1958 on the basis of the
average of grinding done in the past three years. there was
also the additional. fact that the respondent had in spite
of repeated numberices number produced its account books for the
assessment year 1957-58. these facts in our opinion were
germane to the formation of the belief of the assessing
authority that part of the turnumberer of the respondent had
escaped assessment to tax. it cannumber be said that the above
belief was number formed in good faith or was mere pretence for
initiating action under section 21 of the act. the
assessing authority in the circumstances in our opinion
acted within the ambit of its powers in initiating
proceedings under section 21 of the act. we are unable to accede to the companytention of mr. karkhanis
that as the assessment sought to be reopened was ex-parte
assessment under rule 41 5  of the uttar pradesh sales tax
rules numberproceedings in respect of that assessment can be
initiated under section 21 of the act. there is numberhing in
that section to restrict its operation to assessments other
than those which have been made ex-parte under rule 41 5 . the language of the section makes it plain that the
assessing authority can take action if such authority has
reason to believe that the whole or part of the turnumberer of
a dealer has for any reason escaped assessment
 1   1961  41 i. t. r. 191.
to tax for any year. to accede to the companytention of mr.
karkhanis would be tantamount to affording protection so
far as the operation of section 21 is companycerned to dealers
who avoid to put in appearance and produce their account
books before the assessing authority. such a companystruction
is number only number warranted by the language of the section it
is manifestly unreasonable inasmuch as it puts a premium on
contumacy. mr. karkhanis has also assailed the answer of the high companyrt
to question number  11  and has companytended that the numberice dated
september 13 1961 and the memorandum dated march 13 1962
should be companystrued as numberices under section 21 of the act. as the re-assessment was number companypleted within one year of
the service of these numberices the re-assessment according
to the learned companynsel should be held to be barred by
limitation. there is in our opinion numberforce in this
contention we agree with the high companyrt that the above
numberice and the memorandum were of a preliminary nature and
did number companystitute numberices under section 21 of the act. all
that was stated in the said numberice and the memorandum was to
call upon the respondent to produce account books. threat
was also held out that in case of numbercompliance by the
respondent proceedings would be taken under section 21 of
the act. the above numberice and the memorandum companyld number
consequently be companystrued as numberices under section 21 of the
act. it was only on march 24 1962 that numberice under
section 21 of the act was given to the respondent and the
same was served on march 26 1962. the assessment under
section 21 was made on march 19 1963 which was admittedly
within one year of the date of the service of the numberice
under section 21 of the act. we accordingly accept the appeal and discharge the answer
given by the high companyrt to question number  1 .


original jurisdiction petition number 19 of 1959.
petition under article 32 of the companystitution of india
for enforcement of fundamental rights. veda vyasa s. k. kapur and ganpat rai for the
petitioners. m. sikri advocate-general for the state of
punjab

s. bindra and d. gupta for the respondents. 1959. numberember 13. the judgment of the companyrt was
delivered by
gajendragadkar j.-the okara electric supply company limited
which is a joint stock companypany and shrimati v. v. oberoi
one of the principal shareholders of the said companypany
 hereinafter called petitioners 1 and 2 respectively  have
filed the present petition against the state of punjab and
the punjab
state electricity board  hereinafter called respondents 1
and 2 respectively  in which they have claimed a writ order
or direction in respect of a numberice issued the by respondent
1 on january 3 1958. the petition was presented on january
3 1959 and it claimed an order or writ restraining the
respondents from giving effect to the said numberice. it
appears that on january 4. 1959 in pursuance of the said
impugned numberice the respondents took possession of the
petitioners property in question and so by an order
passed by the learned chamber judge the petitioners were
allowed to make an additional claim for a writ or order or
direction in the nature of mandamus directing the
respondents to hand over to the petitioners the said
property in question. this petition is made on the ground
that the impugned numberice and action taken by the respondents
in pursuance of it are illegal and unauthorised and they
affect the petitioners fundamental rights under arts. 19
and 31 of the companystitution. the first petitioner was granted sanction under s. 28 of
the indian electricity act 1910  9 of 1910   hereinafter
called the act  authorising it to engage in the business of
supplying energy at muktsar by government numberification number
1766-1 c-48/28784 published on may 26 1948. by virtue of
the said sanction the first petitioner has ever since been
engaged in the business of supplying electric energy at the
said place and for the purpose of its business it has set
tip an electricity undertaking at companysiderable companyt. on
january 3 1958 the secretary to respondent 1 p. w. d.
irrigation and electricity branches chandigarh issued
numberice against the first petitioner purporting to exercise
the option given to respondent 1 by cl. 11 of the said
numberification. by this numberice the first petitioner was told
that respondent 1 had exercised its option under the said
clause and -that on -the expiry of the period of one year
after the receipt of the numberice by the first petitioner its
undertaking shall vest in and become the absolute property
of respondent 1.
the first petitioner has been having bulk supply from p. w.

electricity branch of respondent 1 and
according to the petition respondent 1 companyld number and will
number take over the plant and yet has ordered the first
petitioner that it cannumber sell the plant without permission
of respondent 1. the imposition of this companydition is wholly
illegal and it amounts to an unreasonable restriction on the
petitioners right to carry on business and to hold and
dispose of its property. the petition alleges that cl. 1 1 of the numberification on
which the impugned numberice is founded is ultra vires s. 28 of
the act and that alternatively if the inclusion of the
said clause in the numberification is justified by s. 28 of the
act s. 28 itself is ultra vires since it offends against
arts. 19 and 31 of the companystitution. it is on these
allegations that originally the petition claimed an order
against the enforcement of the numberice and subsequently added
the prayer for a writ of mandamus directing respondent 1 to
restore to the petitioners possession of the property which
has been taken over by respondent 1 after the filing of the
present petition. the claim thus made is denied by both the respondents. it
is urged that the petitioners cannumber challenge the validity
of cl. 11 which was accepted by them before the companystitution
came into force. it is further urged that the said clause
is justified by the provisions of s. 28 of the act and that
both the said clause and s. 28 are intra vires and valid. the respondents further alleged that after possession was
taken of the property of the first petitioner in exercise of
the option under cl. 11 the first petitioner had been
repeatedly called upon by the respondents to assist them in
making a proper valuation of the assets of the first
petitioner taken over by the respondents. in fact an amount
of rs. 60000 has been paid to the first petitioner in part
payment by way of companypensation and it has been accepted by
it though under protest but the work of companypleting the
valuation of the total assets has been delayed and hampered
by the number-cooperative attitude of the first petitioner. thus the first question which falls to be decided on this
petition is whether cl. 11 of the numberification is
justified by s. 28 of the act. the numberification companysists
of 14 clauses and it sets out exhaustively the terms and
conditions on which sanction had been granted to the first
petitioner under s. 28 of the act. for the purpose of the
present petition it would be enumbergh to refer to 11 only. this clause provides that the provincial government shall
have the option to acquire the undertaking at any time
october 21 1950 provided firstly that number less than one
year- numberice in writing of the election to acquire shall
be served upon the supplier by the provincial government
provided secondly that the generating station shall number form
part of the undertaking for the purpose of acquisition if
the undertaking is acquired after grid supply from the east
punjab public works department electricity branch has
reached muktsar provided thirdly that the price to be paid
to the supplier for such lands buildings works materials
and plant as may be acquired by the provincial government
under this clause will be the fair market value at the time
of purchase  without any addition in respect of companypulsory
purchase or of goodwill or of any profits which may be or
might have been made from the undertaking  such value to be
in case of difference or dispute determined by arbitration
in the manner prescribed in s. 52 of the act provided
fourthly that the provincial government shall pay the price
of the property acquired under this clause within a period
of six months after the price has been determined. mr. veda
vyas for the petitioners companytends that the companydition which
gives respondent 1 the option to acquire the property of the
petitioners is ultra vires. we are companycerned with s. 28 as it stood prior to its
amendment by act 32 of 1959. section 28 1  reads thus
numberperson other than a licensee shall engage in the
business of supplying energy except with the previous
sanction of the state government and in accordance with such
conditions as the state government may fix in this behalf
and any agreement to the companytrary shall be void. the act which was passed in 1910 to amend the law relating
to the supply and use of electrical energy was intended to
provide for and regulate the supply of energy by granting
licences and so the provisions in respect of licences are
dealt with by ss. 3 to 27 in part 11. part iii in
which s. 28 occurs deals with the supply of energy number-
licensees. it appears that the legislature intended to
adopt the companyrse of sanctioning the supply of energy by
lion-licensees as a temporary measure and in areas wherever
it was expedient to do so. a person other than a licensee
cannumber engage in the business of supplying energy except
with the previous sanction of the state government and s.
28 1  authorises the state government to impose companyditions
subject to which it proposes to grant sanction. this
position is number disputed but the argument is that the
conditions which can be legitimately imposed in granting
sanction must be such as would relate to or have bearing on
the business of supplying energy. such companyditions in this
behalf  it is urged cannumber include any companyditions as to
compulsory acquisition of the property of the person to whom
sanction is intended to be given. the acquisition of such
property does number relate and has numberbearing on the business
of supplying energy and is in numbermanner companynected with it. it would be companypetent to the state government to provide for
the area of supply the aerial lines the nature of the
supply the limitation of prices to be charged for the
supply of energy and the purchase of energy in bulk. these
and other similar companyditions can be properly regarded as
conditions in behalf of the business if supplying energy
but the companydition of companypulsory acquisition of the
suppliers property cannumber be treated as falling under s.
28 1 . in support of this companystruction reliance is placed on the
provisions of ss. 5 and 6 which specifically deal with the
question about the acquisition of the undertaking. section
3 of the act provides for the granting of licences and s. 4
for the revocation and amendment of licences. having
provided for the grant revocation and amendment of the
licences s. 5 deals inter
alia with the question of paying companypensation. to the
licensee whose licence has been revoked similary s. 6 makes
appropriate provisions for companypensation where the licence
of local authority has been revoked. section 7 makes a
provision for the purchase of an undertaking and lays down
the procedure for determining the value of the properties. the petitioners urge that where the legislature thought it
necessary to acquire properties of the licensees either on
the revocation or the cancellation of the licences it has
made express provisions in that behalf a similar provision
would have been made in respect of persons other than
licensees to whom sanction is granted under s. 28 if it was
in the companytemplation of the legislature that the properties
of such persons may be acquired. thus presented the
argument numberdoubt appears to be plausible. prima facie
there is. some force in the companytention that companyditions in
this behalf in the companytext should mean companyditions which
are relevant to or companynected with the business of supplying
energy. in deciding this question however it is essential
to bear in mind the specialnature of the article
viz. energy for the supply ofwhich sanction is
granted and to take intoaccount the scheme of the act
in regard to the companyditions which are intended to be imposed
on the business of its supply. in this companynection it would number be unreasonable to ascertain
how the supply of. energy is regulated in england and
america. it is clear that the act is based on the
provisions of the english law and it would be useful to
inquire whether companyditions for the acquisition of the
suppliers property were treated as a part of the companyditions
on which the supplier was allowed to carry on the business
of supplying electricity. this aspect is companysidered by
halsbury under the heading acquisition of undertaking by
-local authority in local authority  it is observed
within whose jurisdiction the area of supply or any part of
it is situated may within six months after the expiration of
42 years or any shorter period specified in the special
order from the companying to force of the said
order  by a numberice in writing require the undertakers to
sell and thereupon the undertakers must sell too them their
undertaking or so much -of it as within its jurisdiction
upon terms of paving the then value of all lands buildings
works materials and plant of the undertakers suitable to
and used by them for the purpose of the undertaking within
such jurisdiction such value to be determined by arbitration
in case of difference  1 . it would thus appear that where
sanction was given to a person for carrying on the business
of supplying electricity under a special order a companydition
was introduced in the said order itself for the companypulsory
acquisition of the undertaking on payment of adequate
compensation to the person companycerned. subsequently after the passing of the electric lighting
act 1909 powers to supply electricity were number granted by
provisional orders but a large number of such orders still
remained in force and as halsbury has observed many of
these orders are in a standard form but a number companytain
special clauses of which the most companymon is a clause giving
special purchase rights to local authorities. these special
orders were companyfirmed by acts and companytained special clauses
for the protection of companynty bridges for the breaking up of
streets for the companynection of the generating stations and
systems of different undertakings and the use of such
generating stations in companymon for the purpose of such
undertakings  2 . it is thus clear that where a licence
was given to a person to supply electricity it generally
included the right of the licensing authority to acquire the
licensees property on terms and companyditions included in the
licence by the provisional order. the american lawyers describe the right or privilege to
supply electricity as a franchise. this right falls under a
class of rights in public streets which are granted for
furtherance of public purposes but which involving as they
do the right to use the streets in

halsburys laws of england vol. 12 2nd ed. page
597 art. 1152.

halsburys laws of england vol. 12 2nd ed. page
668 footnumbere  t . various ways give rise to a series of questions as between
the grantee of the right on the one hand and the
municipality or abutting owners on the other dillon in
muncipal companyporations further observes that for
convenience these rights are described as franchises to use
the public streets and highways and whether companyrectly or
incorrectly denumberinated franchises they answer in essential
respects to the definition and elements of a franchise from
the state . the business of furnishing water and light
observes the author when carried on by a companyporation or
individual of necessity involves the use of streets and
highways of the municipality and the right to lay pipes
mains and companyduits and to erect poles and stretch wires
therein and to maintain operate and use them is a
franchise vested in the state and it can only be exercised
by a companyporation or individual pursuant to the authority
granted by the state  2 . the question of the purchase of works of companypanies by
municipality is also companysidered by dillon where a
municipal companyporation has granted a franchise to a water or
gas companypany to companystruct its plant to use the city streets
for pipes and mains and to furnish water or light to the
city and its inhabitants it has been held that the
legislature under special companystitutional restrictions was
without authority to companypel the city to purchase the
property or plant of the companypany if it desired to acquire or
construct works of its own but in the absence of
constitutional limitations statutes may be enacted and
contracts made which in their effect prevent municipalities
from establishing water works of their own until they have
at least offered to purchase the works of companyporations
organised and existing within their limits  3 . the
learned author also says that if a municipality stipulates
in a companytract with a water or other public service companypany
that it shall have the- right to purchase the works of the
company at a time and in a

dillons municipal companyporations 5th ed. vol. 111 p. 1905 s. 1210.

dillons municipal companyporations 5th ed. vol. 111 p. 213637 s. 1304.

ibid p. 2183 s. 1312
manner specified and if such stipulation is inserted in and
becomes a part of a grant of the right to use
electric the streets and public places of the municipality
for the purpose of laying mains and pipes the companypor-
ation is estopped to deny the authority of the municipality
to make and enforce the stipulation  1 . in new orleans gas light company v. louisiana light and heat
producing and manufacturing company  2  it has been held by the
supreme companyrt of the united states of america that the
manufacture and distribution of gas by means of pipes mains
and companyduits placed under legislative authority in the
public ways of a municipality is number an ordinary business
in which everyone may engage as of companymon right upon terms
of equality but is a franchise relating to matters of
which the public may assume companytrol and when number forbidden
by the organic law of the state may be granted by the
legislature as a means of accomplishing public objects to
whomsoever and upon what terms it pleases . in that case
the question which arose for decision of the companyrt related
to the validity of the companystitutional prohibition upon state
laws impairing the obligation of companytracts but with that
aspect of the matter we are number companycerned in the present
appeal. it thus appears that american lawyers describe the
business of supplying energy as well as the business of
supplying water and gas as a franchise and it also appears
that in granting licence or sanction to a person to engage
in such business a companydition is usually imposed for the
compulsory acquisition of the business when the licence or
sanction companyes to an end. let us look at this question from a practical point of
view. if a person is granted sanction to engage in the
business of supplying energy it is number denied that s. 28 1
would justify the imposition of a time limit on the grant of
sanction. if sanction is granted for a specified number of
years and it companyes to an end what would happen to the
constructions made by the supplier for the purpose of
supplying energy ? he

ibid. p. 2187 s. 1312.  2  115 u.s. 650 29 l. ed. 516.
cannumber dismantle them because thereby he would cause damage
to public property such as streets and so he cannumber take
them away. in such a case the legislature may well provide
for the acquisition of such companystructions in order to
safeguard the interest of the person to whom temporary
sanction is granted. such a provision also serves anumberher
public purpose. it guarantees the availability of suitable
constructions and works which may be used for the
continuance of the supply of electricity by anumberher agency. in other words the statutory provision which deals with the
grant of sanction to a person to engage in the business of
supplying energy must having regard to the special features
of the business necessarily deal with the position which
would arise on the termination of the sanction and so it
would number be unreasonable to assume that the statutory
provisions which deals with this question would think of
making adequate provision empowering the state government to
provide for the companypulsory acquisition of the assets of the
supplier on payment of proper companypensation. it is in the
light of this special feature of the business of supplying
energy that we must companystrue s. 28 1  of the act. besides the provisions of ss. 5 6 and 7 also afford
assistance in the matter. they clearly show that in the
case of a licence specific provisions have been made for the
acquisition of the undertaking in cases of revocation or
cancellation of licences. the reason for thus providing for
compulsory acquisition of licensees undertaking is equally
relevant in the case of the sanction with which s. 28 1
deals. it is true that s. 28 does number specifically and
expressly provide for companypensation as the other sections do
but that must be because recourse to the provisions of pt. iii was intended number to be the rule but only as a temporary
measure wherever it was deemed necessary to do so and so
the legislature left it to the state government to provide
for companypulsory acquisition in the light of the guidance
given by the provisions companytained in ss. 5 6 and 7.
let us then look at s. 28 1  in the light of these company-
siderations. it authorises the state government to
give sanction to a person to engage in the business of
supplying energy on companyditions in that behalf. the
expression such companyditions in this behalf in the companytext
should -take in companyditions dealing with the
position which would inevitably arise when the business
comes to an end. there is numberdoubt that the
grant of sanction companytemplated by s. 28 cannumber be permanent. it-was always bound to be temporary issued on an ad hoc
basis according to the requirement of each case and when
granting sanction for a specified number of years it is in
the interest of the grantee himself that some provision
should be made for payment of companypensation. to him in
respect of the investment made by him in carrying out the
business of supplying energy when otherwise it would be
difficult for him to companylect his assets in that behalf. that is why we think that the relevant words should number be
given a narrow and limited companystruction for which the
petitioners companytend. in our opinion the companytext requires
that the said words should receive a wider and liberal
construction. a companydition for the acquisition of the
property of the petitioners like cl. 11 would therefore
fall within the scope of s. 28 1 . the challenge to the
validity of this companydition on the ground that it is ultra
vires s. 28 1  must accordingly fail. if s. 28 permits the imposition of such a companydition does
it violate art. 19 or art. 31 of the companystitution ? that is
the next question which must be companysidered. it is number
seriously disputed that art. 31 2  on which reliance is
placed by the petitioners cannumber be of much help to them for
art. 31 5  provides inter alia that numberhing in cl.  2  shall
affect the provisions of any existing law other than the law
to which the provisions of cl.  6  applies. it is companyceded
that cl.  6  does number apply to the act so that it follows
that art. 31 2  cannumber be invoked to challenge the validity
of the act. mr. veda vyas attempted to companytend that the
vires of the act companyld be challenged if number under art. 31 2
at least under s. 299 2  of the government of india act
1935 but he realised that he was up against a similar
difficulty created by the provisions of s. 299 4  which says
that numberhing in s. 299 shall affect the provisions
of any law in force at the date of the passing of the act
and he companyceded that in 1910 when the act was passed the
legislature was companypetent to -pass it and it then suffered
from numberinfirmity. that is why though an attempt was made
to press into service art. 31 2  it was ultimately given
up. we need number therefore discuss this point any further. in regard to the attack on s. 28 on the ground that it
offends art. 19 f  or  g  the answer is obvious. the
limitations imposed by s. 28 quite clearly are reasonable
restrictions and have been imposed in the interests of the
general public within the meaning of art 19 5  of the
constitution. as we have already seen such limitations are
generally imposed on the business of supplying energy and
their reasonableness cannumber be and has in fact number been
seriously challenged. therefore we have numberhesitation in
holding that the vires of s. 28 cannumber be successfully
challenged. incidentally we may observe that on the day when the
constitution came into force what vested in the petitioners
was the property subject to the liability imposed on it by
cl. 11 of the numberification and so when the companystitution
came into force the only rights which the petitioners had in
their property in question were rights of a limited
character which were subject to the exercise by the state of
its election to acquire the said property. in this
connection the respondents rely on the decision of this
court in director of endowments government of hyderabad v.
akram ali 1  and seek to urge that the exercise of the
option given to respondent 1 by cl. 11 of the-numberification
cannumber be successfully challenged as ultra vires under art. 19 of the companystitution we do number however think it neces-
sary to decide this point because it was fairly companyceded
before us that if s. 28 is valid and is companystrued to include
a companydition like cl. it of the numberification numberother point
would survive. there is one more minumber point to which reference may be
made.