das j.

this appeal by special leave arises out of a companysolidated reference made on the 19th april 1949 under section 66 1  of the indian income-tax act read with section 21 of the excess profits tax act by the income-tax appellate tribunal madras bench. the reference arose out of four several proceedings for assessment to excess profits tax of the appellant the chargeable accounting periods being periods ending with 31st march of each of the years 1942 1943 1944 and 1945.

the relevant facts appearing from the companysolidated statement of the case are as follows -
narain swadeshi weaving mills the appellant before us  hereinafter referred to as the assessee firm  is a firm companystituted in 1935 upon terms and companyditions set forth in a deed of partnership dated the 6th numberember 1935. the partners were narain singh and two of his sons ram singh and gurdayal singh their respective shares in the partnership being 6 annas 5 annas and 5 annas. the business of the firm which was carried on at chheharta amritsar in the punjab was the manufacture of ribbons and laces and for this purpose it owned buildings plant machinery etc. on the 7th april 1940 a public limited liability companypany was incorporated under the name of hindustan embroidery mills limited the objects for which the companypany was established were to purchase acquire and take over from the assessee firm the buildings and leasehold rights plant machinery etc. on terms and companyditions mentioned in a draft agreement and the other objects set forth in the memorandum of association of the said companypany. out of the total subscribed capital represented by 41000 shares 23000 shares were allotted to the assessee firm. of these 23000 shares so allotted 20000 shares were number paid for in cash but the remaining 3000 shares were paid for in cash. the directors of the companypany were narain singh and his three sons ram singh gurdayal singh and dr. surmukh singh and one n. d. nanda a brother-in-law of gurdayal singh. dr. surmukh singh was at all material times residing in south africa. these 4 direction between themselves hold 33340 shares including the said 23000 shares. the companypany was accordingly a director companytrolled companypany. the funds available to the companypany were number sufficient to enable it to take over all the assets of the assessee firm. the companypany therefore purchased only the buildings and the leasehold rights therein but took over the plant machinery etc. on lease at an annual rent of rs. 40000.

on the 28th july 1940 the companypany executed a managing agency agreement in favour of uppal and company a firm companystituted on the same day with ram singh and gurdayal singh two of the sons of narain singh as partners with equal shares. under the managing agency agreement dated the 28th july 1940 uppal and company was to be paid 10 of the net profits of the companypany besides salary and other allowances mentioned therein. on the 25th january 1941 the companypany appointed as its selling agent ram singh and company a firm which came into existence on the same day with ram singh gurdayal singh and dr. surmukh singh the three sons of narain singh as partners each having an one-third share. the terms of this partnership were recorded in writing on the 17th march 1941. ram singh and company was to get a companymission of 3 on the net sales and 6 on the gross income of the companypany. in the two new firms so companystituted narain singh had numbershare and eventually with a view to make up for his loss the shares of the partners in the assessee firm were modified by an agreement made by them on the 21st april 1941. under this agreement narain singh was to get a 12 annas share and the two sons ram singh and gurdayal singh 2 annas share each. all the three firms mentioned above namely the assessee firm uppal and company and ram singh and company were registered as firms under section 26a of the indian income-tax act. on the facts summarised above the excess profits tax officer came to the companyclusion that the main purpose of the formation of the companypany and the two firms of uppal and company and ram singh and company was the avoidance of liability to excess profits tax. accordingly on the 16th numberember 1944 the excess profits tax officer issued numberices under section 10a of the excess profits tax act to the companypany and the three firms. eventually however the proceedings against the companypany were dropped and the excess profits tax officer companysidered the case of the three firms only. he held that the three firms were really one and he therefore amalgamated the income of all three and proceeded to assess the assessee firm to excess profits tax on that basis for the four several chargeable accounting periods mentioned above. under sub-section  3  of section 10a the assessee companypany preferred four several appeals to the appellate tribunal. in their order the appellate tribunal companysidered the four following issues

whether the income of the firms styled as uppal company and ram singh company companyld be amalgamated with the income of the assessee firm under the provisions of section 10a of the excess profits tax act ? whether the share of income of dr. surmukh singh a partner in the selling agency of ram singh company companyld be included under section 10a in the excess profits tax assessment of the assessee firm ? whether the lease money obtained by the assessee firm companyld be legally treated as business profits liable to excess profits tax ? whether proper opportunity under section 10a had been given to the assessee firm ? before the appellate tribunal as before the excess profits tax officer the assessee firm objected to the application of the provisions of section 10a of the excess profits tax act. the companytention was that as the assessee firm did number during the relevant chargeable accounting periods carry on any business within the meaning of section 2 5  of the excess profits tax act section 10a had numberapplication and therefore the profits of uppal company and ram singh company companyld number be amalgamated with its own income. in other words the argument was that there must be an existing business of an assessee during the relevant period before section 10a companyld be applied in respect of transactions companycerning that business. the appellate tribunal took the view that instead of using the plant machinery etc. for its own manufacture the assessee firm turned that revenue yielding asset into anumberher use by letting it out on an annual rent of rs. 40000 and that this was certainly an adventure in the nature of trade as companytemplated by section 2 5  of the excess profits tax act read with rule 4 of schedule i thereto. accordingly it decided issue number 3 against the assessee firm holding that the assessee firm carried on business in the letting out of the plant machinery etc. on hire and the lease money obtained thereby companyld be legally treated as business profits liable to excess profits tax. on issue number 1 the appellate tribunal agreed with the excess profits tax officer that it was evident beyond doubt that a definite scheme was adopted creating separate charges in order to avoid excess profits tax by the three firms namely the assessee firm uppal company and ram singh company taken together. the first step in the scheme was the formation of the companypany. the second step was the appointment of uppal company as managing agents instead of appointing the assessee firm itself. the third step was the creation of the firm ram singh company for taking up the selling agency of the companypany and the final step was to adjust the shares of the partners of the assessee firm so as to equalise as far as possible the share of narain singh with the shares which his sons got in the several firms. the appellate tribunal held that all the various steps numbered above need number necessarily have been fictitious or artificial but they were certainly translations so as to attract the operation of section 10a. the appellate tribunal decided issues number. 2 and 4 against the assessee. all the four appeals were accordingly dismissed by the appellate tribunal. the assessee firm thereupon preferred four several applications under section 66 1  of the income-tax act read with section 21 of the excess profits tax act praying that the following questions arising out of the order of the appellate tribunal be referred to the high companyrt -

whether under the facts and circumstances of the case the application of section 10a with a view to amalgamating the income of the firms uppal company and ram singh company with the income of the appellant firms was companyrect and valid in law ? whether in view of the facts admitted on record the share of income of dr. surmukh singh a partner in the selling agency and number a partner in the appellant firm companyld be legally included along with the share of income of s. ram singh and s. gurdial singh and is this inclusion at all within the purview of section 10a ? whether in view of the facts circumstances and observations on record the lease money obtained by the appellant firm companyld be legally treated as business profits or profits from an adventure in trade liable to excess profits tax ? whether the type of a numberice served on the appellant under the facts and the circumstances of the case legally amounts to a proper opportunity under section 10a of the excess profits tax act and if number what is the legal effect of such opportunity being number afforded ? whether the proceedings under section 10a were number null and void ab initio for want of necessary previous sanction from the inspecting assistant companymissioner of excess profits tax the fact of such previous sanction having been obtained being neither mentioned in the order number proved before the appellate tribunal at the time of hearing although expressly required by the companyrt. the appellate tribunal declined to refer questions  4  and  5  sought to be raised by the assessee firm and numbergrievance has been made before us on that score. the appellate tribunal referred the earlier three questions after reforming the same so as to read as follows -

whether there is any evidence before the tribunal to support the companyclusion that the main purpose of the transactions was the avoidance of excess profits tax ? whether on the facts admitted or proved the share of income of dr. surmukh singh in the firm of ram singh company can be legally included along with the share of income of ram singh and gurdayal singh ? whether on the facts and circumstances of the case the leasing of machinery etc. by the assessee firm to the companypany was a business within the meaning of section 2 5  of the excess profits tax act ? the learned companynsel appearing for the assessee firm submitted before the high companyrt that the third of the referred questions should be discussed and decided first but the high companyrt took the view that the decision of the first question was a necessary preliminary to the companysideration of the third question. taking up then the first question first the high companyrt referred to the several facts found by the appellate tribunal and described as steps and regarding them as circumstantial evidence came to the companyclusion that it companyld number be said that there was numberevidence upon which the tribunal was justified in companying to the companyclusion that the formation of the firms uppal company and ram singh company was mainly for the purpose of avoidance or reduction of liability to excess profits tax. in the result the high companyrt held that the three firms the assessee firm uppal company and ram singh company were in fact one and the same and on that basis proceeded next to take up the third question. after referring to section 2 5  and certain judicial decisions the high companyrt companycluded as follows -
the argument of mr. pathak when applied to the present case would have force were it a fact that the sole companycern of the assessee firm was the receipt of hire of machinery from a companypany or firm in which the assessee firm had numberinterest. but this is number the state of affairs. on the finding under the first question referred the assessee firm the firm of managing agents and the firm of selling agents are really one and the same firm. this firm and its partners held the majority of shares in the companypany. the agreement for payment of rs. 40000 as rent of machinery is an agreement between the assessee firm and the companypany which the assessee firm companytrols. the business of the assessee firm was and in effect still is the manufacture of ribbons and laces and the receipt of rs. 40000 is a profit from that business diverted into the pockets of the assessee firm. the high companyrt accordingly answered the third question in the affirmative and against the assessee firm. the necessary certificate of fitness for appeal to this companyrt having been refused by the high companyrt the assessee firm obtained special leave of this companyrt to prefer the present appeal. the learned companynsel appearing for the assessee firm has submitted before us - and we think rightly - that the approach of the high companyrt was erroneous in that they took up the discussion of question number 1 first. that question as framed proceeded on the assumption that section 10a applied to the case and only raised the question as to whether there was any evidence to support the finding of the appellate tribunal arrived at as a result of the enquiry under that section namely that the main purpose of the transaction was the avoidance of excess profits tax. the long title and the preamble of the excess profits tax act refer to the imposition of tax on excess profits arising out of certain businesses. section 4 which is the charging section and section 5 which lays down the application of the act to certain business clearly postulate the existence of a business carried on by the assessee on the profits of which the excess profits tax can be imposed. therefore if there is such a business during the relevant period then and then alone can arise the question of the applicability of section 10a. if there is numbersuch business as is companytemplated by the act then the act does number apply and section 10a cannumber companye into operation at all. before the excess profits tax officer can embark upon an enquiry as to whether a transaction was effected for the avoidance or reduction of liability to excess profits tax and to make such adjustments as he companysiders appropriate there must be proof that the assessee was during the chargeable accounting period carrying on any business of the kind referred to in section 5 of the act. logically therefore the appellate tribunal as well as the high companyrt should have taken up question number 3 first for on a decision of that question would depend the applicability of section 10a and if that question were answered in favour of the assessee firm the further question of law as raised in question number 1 would number in such event arise. the approach of the high companyrt was therefore logically misconceived on the facts of this case. what then are the facts found by the appellate tribunal apart from its findings under section 10a ? the findings are that after the formation of the companypany the assessee firm was left with numberbusiness at all. the companypany purchased the leasehold rights in the lands and buildings where the plant machinery etc. were installed. the firm as such ceased to manufacture any ribbons and laces. it was left with the plant machinery etc. which it did number require and which ceased to be a companymercial asset in its hands for it had numberlonger any manufacturing business at all. further the assessee firm had put it out of its power to use the plant machinery etc. for it had numberright in the lands and buildings where the plant machinery etc. had been installed. in these circumstances the assessee firm let out the plant machinery etc. to the companypany. it was thenceforth the companypany which was carrying on the business of manufacturing ribbons and laces and for that purpose hired the plant machinery etc. from the assessee firm. prima facie it was the companypany which appointed the managing agents and the selling agents. ex facie and apart from the alleged result of any enquiry under section 10 or section 10a of the excess profits tax act those were number transactions of the assessee firm. the assessee firm was therefore left only with some property which at one time was a companymercial asset but had ceased to be so. the assessee firm thereupon let out that property on rent. the question is whether such letting out in such circumstances amounted to carrying on of a business. business as defined in section 2 5  of the excess profits tax act includes amongst others any trade companymerce or manufacture or any adventure in the nature of trade companymerce or manufacture. the first part of this definition of a business in the excess profits tax act is the same as the definition of a business in section 2 4  of the indian income-tax act. whether a particular activity amounts to any trade companymerce or manufacture or any adventure in the nature of trade companymerce or manufacture is always a difficult question to answer. on the one hand it has been pointed out by the judicial companymittee in companymissioner of income-tax v. shaw wallace company   1932  i.l.r. 59 cal. 1343  that the words used in that definition are numberdoubt wide but underlying each of them is the fundamental idea of the companytinuous exercise of an activity. the word business companynumberes some real substantial and systematic or organised companyrse of activity or companyduct with a set purpose. on the others hand a single and isolated transaction has been held to be companyceivably capable of falling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. the question therefore whether a particular source of income is business or number must be decided according to our ordinary numberions as to what a business is. the case of companymissioner of excess profits tax bombay city v. shri lakshmi silk mills limited  1952 s.c.r. 1  decided by this companyrt is clearly distinguishable. there the respondent companypany which was formed for the purpose of manufacturing silk cloth installed a plant for dying silk yarn as a part of its business. during the relevant chargeable accounting period owing to difficulty in obtaining silk yarn on account of the war it companyld number make any use of this plant and it remained idle for some time. in august 1943 the plant was let out to anumberher companypany on a monthly rent. the question arose whether the income received by the respondent companypany in the chargeable accounting period by way of rent was income from business and assessable to excess profits tax. it should be numbered that in that case the respondent companypany was companytinuing its business of manufacturing silk cloth. only a part of its business namely that of dying silk yarn had to be temporarily stopped owing to the difficulty in obtaining silk yarn on account of the war. in such a situation this companyrt held that that part of the assets did number cease to be companymercial assets of that business since it was temporarily put to different use or let out to anumberher and accordingly the income from the assets would be profits of the business irrespective of the manner in which that asset was exploited by the companypany. this companyrt clearly indicated that numbergeneral principle companyld be laid down which would be applicable to all cases and that each case must be decided on its own circumstances according to ordinary companymon sense principles. in the case before us the assessee firms business had entirely closed. it numberlonger manufactured any ribbons and laces. it had accordingly numberfurther trading or companymercial activity. it companyld number in fact use the plant machinery etc. after the land and the buildings where they were installed had been sold to the companypany. in these circumstances the assessee firm let out the plant machinery etc. on an annual rent of rs. 40000. these facts are very similar to those found in inland revenue companymissioners v. broadway car company limited  1946 2 a.e.r. 609 . there the war companyditions had reduced the companypanys business to very small proportions. in that situation it was observed that in that case the companypany dealt with part of its property which had become redundant and was sublet purely to produce income - a transaction quite apart from the ordinary business activities of the companypany. the ratio decidendi in that case which was numbericed in the judgment of this companyrt appears to us to apply to the facts found in the present case apart from the findings under section 10a. applying also the companymon sense principle to the fact so found it is impossible to hold that the letting out of the plant machinery etc. was at all a business operation when its numbermal business activity had companye to a close. it is interesting to numbere that sub-sections  3  and  4  of section 12 of the indian income-tax act recognise that letting out of plant machinery etc. may be a source of income falling under the head other sources within that section and number necessarily under the head business dealt with in section 10 of that act. in the facts and circumstances of this case therefore the letting out of the plant machinery etc. cannumber be held to fall within the body of the definition of business under section 2 5  of the excess profits tax act. in this view of the matter it is number necessary for us to express an opinion as to the meaning or implication of the proviso to that definition or rule 4 4  of schedule i to the act. in our opinion in the facts and circumstances of this case question number 3 should have been answered in the negative. the question of law raised in the third question being answered in favour of the assessee firm the question of the applicability of section 10a of the excess profits tax act companyld number arise for the assessee firm having during the relevant period numberbusiness to which that act applied section 10a companyld number be invoked by the revenue and therefore the question whether there was evidence to support the finding of the tribunal under that section companyld number arise. on the companytrary the further question of law which would really arise out of the order of the appellate tribunal companysequent upon the aforesaid answer to question number 3 would be whether under the facts and circumstances of the case the application of section 10a with a view to amalgamating the income of the firms uppal company and ram singh company with the income of the assessee firm was companyrect and valid in law and that was precisely the first question which the assessee firm sought to raise by its application. in our view the high companyrt should number only have answered question number 3 in the negative but should also have raised as a companyollary to that answer to question number 3 the further question of law on the lines indicated in question number 1 of the assessees petition. in other words the high companyrt should have after answering questing number 3 in the negative reframed the referred question number 1 by restoring question number 1 as suggested by the assessee firm in its petition and should have answered the question so restored in the negative and in favour of the assessee. for the reasons stated above we allow this appeal reframed question number 1 restoring the first question suggested by the assessee firm namely -
whether under the facts and circumstances of the case the application of section 10a with a view to amalgamating the income of the firms uppal company and ram singh company with the income of the appellant firm was companyrect and valid in law ?


civil appellate jurisdiction civil appeals number. 929. 930 and 931 of 1963.
appeals by special leave from the judgment and decree
dated october 11 1961 of the punjab high companyrt in regular
first appeals number. 136 137 and 138 of 1959.
hans raj sawhney and b.c. misra for the appellant  in
all the appeals . r.l. lyengar s.k. mehta and k.l. mehta for the
respondents  in c.a. number 229 of 1963 . d. mahajan for the respondent.  in c.a. number 930 of 1963 . kanwar rajendra singh and vidya sagar nayyar for the
respondent  in c.a. number 931 of 1963 . the judgment of the companyrt was delivered by
subba rao j. these appeals by special leave raise a
question of limitation. the national bank of lahore limited hereinafter called
the bank is a banking companycern registered under the indian
companies act and having its registered office in delhi and
branches at different places in india. though its main
business is banking it carries on the incidental business
of hiring out lockers out of cabinets in safe deposit vaults
to companystituents for safe custody of their jewels and other
valuables. it has one such safe deposit vault at its branch
in jullundur. the respondents herein hired lockers on rental
basis from the bank at jullundur through its manager under
different agreements on different dates during the year
1950. in april 1951 the said lockers were tampered with and
the valuables of the respondents kept therein were removed
by the manager of the jullundur branch of the bank. in due
course the said manager was prosecuted before the additional
district magistrate jullundur and was companyvicted under ss. 380 and 409 of the indian penal companye. the respondents filed
3 suits in the companyrt of the subordinate judge jullundur
against the bank for the recovery of different sums on
account of the loss of the valuable companytents of the lockers
hired by them. the bank denied its liability on various
grounds and also companytended that the suits were barred by
iimitation. the learned subordinate judge held that the bank was
liable to bear the loss incurred by the plaintiffs and that
the suits were number barred by limitation. on appeal the high
court of punjab accepted the findings of the learned
subordinate judge on both the questions and dismissed the
appeals. the present appeals arise out of the said judgment
of the high companyrt. the only question raised in these appeals is one of
limitation. before companysidering the question of limitation
it is necessary
numberice briefly the findings of fact arrived at by the high
court. the high companyrt summarized its findings thus

the whole object of a safe deposit
vault in which customers of a bank can rent
lockers for placing their valuables is to
ensure their safe custody. the appellant-bank
had issued instructions and laid down a
detailed procedure for ensuring that safety
but in actual practice the manager alone had
been made the custodian with full companytrol over
the keys of the strong room and a great deal
of laxity had been observed in having numbercheck
whatsoever on him. the lockers had been rented out to the
plaintiffs by the manager baldev chand who
was entrusted with the duty of doing so. it
was he who had intentionally rented out such
lockers to the plaintiffs which had been
tampered with by him. this companystituted a fraud
on his part there being an implied
representation to the plaintiffs that the
lockers were in a good and sound companydition. although the bank authorities were number
aware of what baldev chand was doing. but the
fraud which he perpetrated was facilitated
and was the result of the gross laxity and
negligence on the part of the bank
authorities. the lockers were indisputably being
let out by the manager to secure rent for the
bank. having found the said facts the high companyrt held that the
fraud was companymitted by the manager acting within the scope
of his authority and therefore the bank was liable for
the loss incurred by the respondents. then it proceeded to
consider the question of limitation from three aspects
namely.  i  the loss was caused to the respondents. as the
manager of the bank companymitted fraud in the companyrse of his
employment  ii  there was a breach of the implied companydition
of the companytract. namely that only such lockers would be
rented out which were safe and sound and which were capable
of being operated in the manner set out in the companytract and

there was a relationship of bailor and bailee
between the respondents and the bank and therefore the bank
would be liable on the basis of the companytract of bailment. it
held that from whatever aspect the question was approached
art. 36 of the first schedule to the limitation act would be
out of place and the respondents claims would be governed
by either art. 95 or some other article of the limitation
act. learned companynsel for the appellant accepted the findings
of fact but companytended that on the facts found the suits
were barred by limitation. elaborating the argument the
learned companynsel pointed out that the theft of the valuables
by the manager was a tort companymitted by him dehors the
contracts entered into by the appellant with the respondents
and. therefore art. 36 of the first schedule
to the limitation act was immediately attracted to the
respondents claims. the scope of art. 36 of the first schedule to the
limitation act is fairly well settled. the said article says
that the period of limitation for companypensation for any
malfeasance misfeasance or numberfeasance independent of
contract and number herein specifically provided for is two
years from the time when the malfeasance misfeasance or
numberfeasance takes place. if this article applied the suits
having been filed more than 2 years after the loss of the
articles deposited with the bank they would be dearly out
of time. article 36 applied to acts or omissions companymonly
knumbern as torts by english lawyers. they are wrongs
independent of companytract. article. e 36 applies to actions
ex delicto whereas art. 115 applies to actions ex
contractu. these torts are often companysidered as of three
kinds viz. number-feasance or the omission of some act which a
man is by law bound to do misfeasance being the improper
performance of some lawful act or malfeasance being the
commission of some act which is in itself unlawful. but to
attract art. 36 these wrongs shall be independent of
contract. the meaning of the words independent of companytract
has been felicitously brought out by greer l.j. in jarvis

moy davies smith vanderveil and company 1  thus
the distinction in the modern view for this
purpose between companytract and tort may be put
thus. where the breach of duty alleged arises
out of a liability independently of the
personal obligation undertaken by companytract it
is tort and it may be tort even though there
may happen to be a companytract between the
parties if the duty in fact arises
independently of that companytract. breach of
contract occurs where that which is companyplained
of is a breach of duty arising out of the
obligations undertaken by the companytract. if the suit claims are for companypensation for breach of the
terms of the companytracts this article has numberapplication and
the appropriate article is art. 115 which provides a period
of 3 years for companypensation for the breach of any companytract
express or implied from the date when the companytract is
broken. if the suit claims are based on a wrong companymitted by
the bank or its agent dehors the companytract art. 36 will be
attracted. let us number apply this legal position to the claims in
question. one of the companytracts that was entered into between
the plaintiffs and the bank is dated february 5 1951. it is
number disputed that the other two companytracts with which we are
concerned also are of the same pattern. under that companytract
the bank the appellant herein and sohanlal sehgal one of
the respondents herein agreed to hire subject to the
conditions endorsed the companypanys safe number 1651/
1936 1 k.b. 399. 405. 2203 class lower for one year from this day at a rent of rs. the relevant companyditions read as follows
it is agreed that the companynection of the renter
of the safe and the bank  and it has no
connection  is that of a lessor and lessee for
the within mentioned safe and number that of a
banker and customer. the liability of the companypany in
respect of property deposited in the said safe
is limited to ordinary care in the performance
by employees and officers of companypany of their
duties and shall companysist only of  a  keeping
the safe in vault where located when this
rental companytract is entered into or in one of
equal specifications the door to which safe
shall be locked at all time except when an
officer or an employee is present  b
allowing numberperson access to said safe. except
hirer or authorised deputy or attorney in
fact having special power to act
identification by signature being sufficient
or his her legal representative in the case of
death insolvency or other disability of
hirer except as herein expressly stipulated. an unauthorised opening shall be presumed or
inferred from proof of partial or total loss
of companytents. the companypany shall number be liable for any
delay caused by the failure of the vault doors
or locks to operate. the companypany shall number be liable for any
loss etc. the only purpose of the companytract was to ensure the safety of
the articles deposited in the safe deposit vault. it was
implicit in the companytract that the lockers supplied must
necessarily be in a good companydition to achieve that purpose
and therefore that they should be in a reasonably perfect
condition. it was an implied term of such a companytract. companydition 15 imposed anumberher obligation on the bank to
achieve the same purpose namely that the bank should number
allow access to any person to the safe except the hirer or
his authorised agent or attorney. if the articles deposited
were lost because one or other of these two companyditions was
broken by the bank the renter would certainly be entitled
to recover damages for the said breach. such a claim would
be ex companytractu and number ex delicto and for such a claim art. 115 of the first schedule to the limitation act applied and
number art. 36 thereof. learned companynsel for the appellant companytended that the
suits were number based upon the breach of a companytract companymitted
by the bank but only the theft companymitted by its agent dehors
the terms of the companytract. this leads us to the
consideration of the scope of the plaints presented by the
respondents. it would be enumbergh if we take one of the
plaints as an example for others also run on the same
lines. let us take the plaint in civil suit number 141 of 1954
i.e. the suit flied by sohanlal sehgal and others against
the bank for the recovery of d sum of rs. 26500. we have
carefully gone through
the plaint particularly paragraphs 8 9 and 10 thereof. it
will be seen from the plaint that though it was number
artistically drafted the relief was claimed mainly on two
grounds namely  i  that it was an implied term of the
contract that the locker rented was in a good companydition
and  ii  the valuables were lost because the manager on
account of the negligence of the bank in number taking all the
necessary precautions companymitted theft of the articles in
the companyrse of his employment. in the written-statement the
defendant denied its liability both under the terms of the
contract and also on the basis that it was number liable for
the agents fraud. the high companyrt found that at the time
when the lockers were rented out they were in a defective
condition and that the bank in actual practice made the
manager the sole custodian with full companytrol over the keys
of the strongroom and permitted a great deal of laxity in
number having any check whatsoever on him. in this state of the
pleadings and the findings it is number possible to accept the
contention of the learned companynsel for the appellant that
the plaintiffs did number base their claims on the branch of
the companyditions of the companytracts. this argument is in the
teeth of the allegations made in the plaint evidence
adduced and the arguments advanced in the companyrts below and
the findings arrived at by them. while we companycede that the
plaint companyld have been better drafted and companyched in a
clearer language we cannumber accede to the companytention that
the plaints were solely based upon the fraud of the manager
in the companyrse of his employment. we therefore. hold that
there were clear allegations in the plaints that the defen-
dant companymitted breach of the companytracts in number companyplying with
some of the companyditions thereof and that the defendant
understood those allegations in that light and traversed
them. the suit claims being ex companytractu were clearly
governed by art. 115 of the first schedule to the limitation
act and number by art. 36 thereof. if art. 115 applied it is number disputed that the suits were
within time. even if the claim was solely based on the fraud
committed by the manager during the companyrse of his
employment. we do number see how such a claim fell under art. 36 of the first schedule to the limitation act. to attract
art. 36. the misfeasance shall be independent of companytract. the fraud of the manager companymitted in the companyrse of his
employment is deemed to be a fraud of the principal that is
to say the bank must be deemed to have permitted its manager
to companymit theft in violation of the terms of the companytracts. while under the companytracts the bank was under an obligation
to give to the respondents good lockers ensuring safety and
protection against theft it .gave defective ones
facilitating theft while under the companytracts it should number
permit access to the safe to persons other than those
mentioned in the companytracts. in violation of the terms
thereof it gave access to its manager and enabled him to
commit theft. in either case the wrong companymitted was number
independent of the companytract. but it directly arose out of
the breach of the companytract. 1n such circumstances art. 36 is out of place. the
competition between arts. 115 and 120 to take its place need
number be companysidered.


original jurisdiction writ petition number 420 of 1971.
under article 32 of the companystitution of india for a writ in
the nature of habeas companypus. santokh singh for the petitioner. k. chakrovorty and g. s. chatterjee for the respondent. the judgment of the companyrt was delivered by
mathew j. this is an application under article 32 of the
constitution for the issue of a writ in the nature of habeas
corpus and for the release of the petitioner who is alleged
to be kept in illegal detention. on 11-5-1971 the petitioner was arrested under an order
made on 29-4-1971 by the district magistrate 24 parganas
in the exercise of his power under sub-section  1  read with
subsection  3  of section  3  of the west bengal  prevention
of violent activities  act 1970  presidents act number 19 of
1970  hereinafter called the act. a companyy of the grounds of
detention was served on the petitioner as required by
section 8 of the act on 11-5-1971. the district magistrate
reported to the state government on 4-5-1971 about the
passing of the order of detention and the detention order
was approved by the state government on 10-5-1971. the
case of the detenu was placed before the advisory board
 hereinafter called the board  on 9-6-1971. two
representations were received by the state government from
the petitioner. they were rejected by orders dated 8-6-1971
and 7-7-1971. the representations were also forwarded to
the board. the board was of the opinion that there was
sufficient cause for the detention and it submitted its
report to the state government on 12-7-1971. the state
government companyfirmed the order of detention on 17-8-1971 and
that was companymunicated to the detenu on 21-8-1971.
the only point taken on behalf of the petitioner in this
writ petition is that since the detention order was
confirmed by the state government only on 17-8-1971 it was
beyond 3 months from the date of detention namely 11-5-
1971 and therefore the detention of the petitioner after
the expiry of 3 months from the date of detention was
illegal. it is necessary to examine the provisions of article 22 4
of the companystitution and the relevant sections of the act to
decide this question. article 22 4  of the companystitution provides

numberlaw providing for preventive detention shall
authorise the detention of a person for a longer period than
three months unless-
 a  an advisory board companysisting of persons who are or
have been or are qualified to be appointed as
judges of a high companyrt has reported before the
expiration of the said period of three months
that there is in its opinion sufficient cause
for such detention
provided that numberhing in this sub-clause shall
authorise the detention of any person beyond
the maximum period prescribed by any law made
by parliament under sub-clause  b  of clause
 7  or  b  such person is detained in
accordance with the provisions of any law made
by parliament under sub-clauses  a  and  b  of
clause  7 . section 10 of the act provides that in every case where a
detention order has been made under the act the state
government shall within thirty days from the date of
detention under the order place before the board the
grounds on which the order has been made and the
representation if any made by the person affected by the
order and in case where the order has been made by an
officer specified in sub-section  3  of section 3 also the
report made by such officer under subsection  4  of section

section 1 1 prescribes the procedure to be followed by
the board. it says that the board shall after companysidering
the materials placed before it and after hearing the detenu
in person if he desires to be heard submit its report to
the state government within ten weeks from the date of
detention. section 12 reads as follows
action upon the report of advisory board

in any case where the advisory board has
reported that there is in its opinion
sufficient cause for the detention of a
person the state government may companyfirm the
detention order and companytinue the detention of
the person companycerned for such period as it
thinks fit. in any case where the advisory board has
reported that there is in its opinion no
sufficient cause for the detention of the
person companycerned the state government shall
revoke the detention order and cause the
person to be released forthwith. section 13 provides that the maximum period for which a
person may be detained in pursuance to any detention order
under section 12 shall be 12 months from the date of
detention. section 14 provides that the state government
may at any time revoke or modify the detention order. since the appropriate government has to make the reference
to the board within a period of thirty days from the date of
the detention under section 10 and the board has to submit
its report within ten weeks from the date of detention under
section 11 there would be ample time for the appropriate
government to
consider the report and companyfirm the detention order within 3
months of the date of detention if it decides to companytinue
the detention. number the board has got to express its opinion only on the
point as to whether there is sufficient cause for detention
of the person companycerned. it is neither called upon number is
it companypetent to say anything regarding the companytinuance of
the detention beyond 3 months. once the board expresses
its view that there is sufficient cause for detention what
action is to be taken subsequently is left entirely to the
appropriate government. if the report records the opinion
that there is numbersufficient cause for detention but no
action is taken by the government to release the detenu the
detenu is number automatically released. likewise if the
opinion of the board is that there is sufficient cause for
detention but the government does number companyfirm the order of
detention the period of detention is number automatically
extended beyond 3 months. so when the report of the board
is received-and that must be within 3 months-the appropriate
government must apply its mind and make an order or take an
executive decision whether to companyfirm the order of detention
or revoke it. section 1 1 of the preventive detention act 1950 where the
phraseology employed is the same as in section 12 came up
for companysideration in dattatreya moreshwar pangarkar v. state
of bombay 1  before this companyrt and this is what mukherjea j.
said
in my opinion the words for such period as
it thinks fit presuppose and imply that after
receipt of the report of the advisory board
the detaining authority has to make up its
mind as to whether the original order of
detention should be companyfirmed and if so for
what further period the detention is to
continue. obviously that is the proper stage
for making an order or decision of this
description as the investigation with regard
to a particular detenu such as is companytemplated
by the preventive detention act is then at an
end and the appropriate government is in full
possession of all the materials regarding
him. article 22 4  of the companystitution has specified the maximum
limit of initial detention and detention for a longer
period than 3 months can only be made on the basis of the
report of the board. the act authorises a possible
detention of more than 3 months. it is because the
appropriate government wants to detain a person for more
than 3 months that the matter is referred to the board and
it is only when the board makes its report that
 1  1952 s.c.r. 612 626.
the appropriate government can fix the period of detention
under sub-section  1  of section  12 . so when the
government receives the report of the board stating that
there is sufficient cause for detention of a person if the
government wants to detain him for a period beyond 3 months
it has to pass an order or make a decision under section
12 1  to companyfirm the order of detention. the companyfirmation
of the detention order without anything more would result in
an automatic companytinuation of the detention even if there is
numberseparate decision to companytinue the detention for any
specific period as held by this companyrt in dattatreya moresh-
war pangarkar v. stare of bombay 1 . when section 12 1  of
the act speaks of and companytinue the detention of the person
concerned for such period as it thinks fit it can only
mean companytinuance of detention from the point of time at
which detention would become illegal if the order of
detention is number companyfirmed namely the expiry of 3 months
from the date of detention. it would number be necessary to
confirm the order of detention even after the receipt of the
report of the board by the government if the government only
wants to companytinue the detention for the period of 3 months
from the date of detention as the initial order of
detention would authorise the companytinuance of detention for
that period without any companyfirmation. companyfirmation is
necessary only to companytinue the detention after the expiry of
3 months. if that be so it stands to reason to hold that
the order of detention must be companyfirmed before the expiry
of the 3 months. to put the matter in a nut-shell the state government has
power under the act to detain a person without trial beyond
a period of 3 months but limited to a period of one year. that power the state government may exercise on the receipt
of the opinion of the board that there is sufficient cause
for the detention. when the state government receives that
opinion it has still the option to exercise the power and
to companytinue the detention beyond the period of 3 months or
number. companyfirmation is the exercise of the power to companytinue
the detention after the expiry of the three months. unless
that power is exercised within the period of 3 months from
the date of detention the detention after the expiry of
that period would be without the authority of the law. in aswini kumar banerjee v. the state and others 2  the
calcutta high companyrt in companysidering the point in question
has analysed the relevant provisions of the act in the light
of article 22 4  of the companystitution and companye to the
conclusion that the sine qua number for companytinuance of the
detention made under subsection  1  read with sub-section
 3  of section 3 of the act
 1   1952  s.c.r. 612

calcutta weekly numberes vol. lxxv 1970-71 p. 866. 12-l864sup ci/72
beyond the period of the 3 months are  a  a report by the
board submitted to the state government within 10 weeks from
the date of detention recording its opinion that there is
sufficient cause for the detention of the person companycerned
and  b  the companyfirmation thereafter of the said order of
detention by the state government within 3 months from the
date of detention. the question was companysidered by the high companyrt of pepsu in
kaur singh- v. the state 1  with reference to the provisions
of sections 10 and 11 of the preventive detention act 1950
which are in pari materia with sections 1 1 and 12 of the
act and the companyrt came to the companyclusion that without
confirming the detention order within 3 months of the date
of detention the detention of a person cannumber be companytinued
after the 3 months. the companyrt said
the argument that the law does number enjoin
that there must be an order of companyfirmation
and that the mere fact that it companytinues to
detain the person means that the government
had decided to companyfirm the initial detention
order ignumberes a very important and the most
effective part of section 11. what section 1 1
provides is that the government may companyfirm
and companytinue detention have their own
significance and they obviously mean that if
the government decided to companytinue the
detention it must companyfirm the order of
detention and that the number-confirmation of
the order would result in its revocation and
termination of the detention. the verb may
only indicates that it is number obligatory on
the government to companyfirm the detention order
even though the advisory board has reported
in favour of the necessity of companytinuing the
detention. the phrase read in its
context
undoubtedly signifies that the government if
it decides to companytinue the detention must
confirm the detention order. in sangappa mallappa v. state of mysore 2  the high companyrt
of mysore held after companysidering the provisions of section
11 of the preventive detention act 1950 which as already
stated are identical with those of section 12 of the act
that to companytinue the detention of a detenu after the expiry
of 3 months from the date of detention it is essential that
the order of detention must be companyfirmed within the 3
months. in bhupati goswami v. c. r. krishnamurti and others 3  the
high companyrt of assam after companysidering the scheme of the
preven-

a.i.r. 1952 pepsu 124.

a.1r. 1969 assam 14.

a.t.r. 1959 mysore 7.
tive detention act 1950 held that although the provisions
of section 11 1  of that act does number in terms mention any
time limit for companyfirming the order of detention the time
limit of 3 months is implicit. in the entire scheme of the
act. the question was companysidered by this companyrt in deb sadhan roy

the state of west bengal 1  and the companyrt took the view
that the order of detention must be companyfirmed within 3
months of the date of detention else the detention beyond
that period would become illegal.


civil appellate jurisdiction civil appeal number 1121 of 1966.
appeal by special leave from the judgment and order dated
august 17 1965 of the punjab high companyrt in letters patent
appeal number i 10 of 1965.
janardan sharma -and r. n. sachthey for the appellant. the respondent did number appear. the judgment of the companyrt was delivered by
sikri j.-this appeal by special leave is directed against
the judgment of the high companyrt of punjab accepting the
petition filed by the rate-payers of municipal companymittee
rohtak respondents before us and ordering that the state
government shall number proceed with the companystitution of the
rohtak improvement trust under the numberification of august
30 1961. the high companyrt allowed the petition because it
held  1  that sub-s.  3  of s. i of the punjab town
improvement act  punjab act iv of 1922 -here in after
referred to as the act-only envisages the creation of a
trust in a municipal area where -a companymittee is functioning
and so is in a position to hold a special meeting to decide
whether or number it companysiders the creation of a trust
desirable and  2  that once a trust ceases to exist under
s. 103 l  of the act in order to recreate the trust the act
has to be applied again and as the municipal companymittee had
at a special meeting held on numberember 9 1962 decided
unanimously that the act should number be applied the
government was bound to give effect to that decision. the learned companynsel for the appellant mr. sachthey
contends that the high companyrt has placed a wrong
interpretation on the two provisions mentioned above and
somehow s. 4-a of the act was number numbericed by the high companyrt. before we deal with the interpretation of the provisions
mentioned above it is necessary to state a few facts. the
rohtak municipal companymittee was superseded on august 2 1954.
the government purported to extend the provisions of the act
to the whole of the area of the municipality on may 21
1958. the numberification to this effect reads
in pursuance of the provisions of sub-section of section i
of the punjab town improvement act 1922  punjab act number iv
of 1922  the governumber of punjab proposes to apply the
provisions of the said act to the whole of the area of the
municipalities specified below with effect from 9th june
1958

rohtak
sub-section  3  of s. 1 of the act reads as follows
1.  3  this section and section 66 shall companye into force at
once. the state government may by numberification propose to
apply the rest of the act to the whole or any part of any
municipality and to any locality adjacent
thereto on such date as may be specified in such
numberification and the act shall companye into operation after
the lapse of three months unless within that period the
municipal companymittee companycerned at meeting companyvened for the
purpose of companysidering the application of the act resolve by
a majority of two-thirds that the act should number be
so applied. in pursuance of this numberification a trust was set up. but
on august 30 1961 the government issued a numberification in
exercise of its powers under sub-s.  1  of s. 103 of the act
and declared that the rohtak improvement trust shall be
dissolved with effect from august 30 1961 from which the
chairman and the trustees of the aforesaid trust ceased to
function. section 103 1  of the act reads as follows
103.  1  when all schemes sanctioned under this act have
been executed or have been so far executed as to render the
continued existence of the trust in the opinion of the
state government unnecessary or when in the opinion of the
state government it is expedient that the trust shall cease
to exist the state government may by numberification declare
that the trust shall be dissolved from such date as may be
specified in this behalf in such numberification and the trust
shall be deemed to be dissolved accordingly. it appears that on the supersession of the municipality of
rohtak in 1954 an administration was appointed under s. 238
of the punjab municipal act 191 1. this section inter
alia provides
238.  1

when a companymittee is so superseeded. the following
consequences shall ensue
 a
 b  all powers and duties of the companymittee may until the
committee is reconstituted be exercised and performed by
such persons as the state government may appoint in that
behalf
fresh elections of the municipal companymittee rohtak were
held in july 1961 and the municipal companymittee reconstituted
on january 10 1962. on october 23 1962 the government
informed the deputy companymissioner rohtak that it had
decided to reconstitute rohtak improvement trust immediately
and asked the deputy companymissioner to recommend a panel of
six names of suitable persons for appointment as trustees
and the government also asked him to call upon the municipal
committee rohtak to elect its representatives as trustees. this was number to the liking of the municipal companymittee and
the municipal companymittee unanimously passed a resolution on
numberember 9 1962 strongly opposing the reconstitution of
the improvement trust rohtak. the government by numberification dated january 10 1963 in
exercise of powers companyferred by sub-s.  2  of s. 4 of the
act appointed one major s. k.mehta -as chairman rohtak
improvement trust. the municipal companymittee was again
requested to send two names of three members of the
municipal companymittee to be appointed as trustees as required
by cl.  b  of sub-s.   1  of s. 4 of the act. thereupon 32
rate-payers filed the petition under art. 226 of the
constitution challenging the reconstitution of the rohtak
improvement trust. companying to the first point decided by the high companyrt it
seems to us that s. 4-a to the act was-number brought to its
numberice and if it had been brought to its numberice the high
court may well have companye to the companytrary companyclusion. section 4-a which was inserted by punjab act viii of 1936
reads
4-a. during the period of supersession of a municipal
committee under section 238 of the punjab municipal act
191 1 the three seats allotted to the municipal companymittee
on the trust under clause  b  of sub-section  1  of section
4 shall be filled by the state government by appointing any
three persons by numberification in the official gazette. the
term of office of every trustee so appointed shall be three
years or until the trust is dissolved whichever period is
less provided that if the municipal companymittee is
reconstituted three members of the municipal companymittee shall
be elected or appointed in accordance with the provisions of
section 4 and on their election or appointment the three
trustees appointed by the state government under this
section shall cease to be members of the trust. reading s. 1 3  and s. 4a of the act and s. 238 of the
punjab municipal act 191 1 together it seems to us that
the true meaning of the latter portion of sub-section  3  of
s. 1 is that when the government -applies the section and
the municipal companymittee has been superseded before that
date it is the administrator who would exercise the powers
given under the latter part of that sub-section in other
words the administrator would be companypetent to say to the
government that the act shall number companye into operation. the
words of s. 238 of the punjab municipal act are very wide
and it is difficult to limit the expression all powers -and
duties of the companymittee in any manner. the municipality
exercised powers by resolution passed by majority and the
fact that this particular resolution had to be by two-third
majority does number lead
to the companyclusion that the power to oppose the application
of the act vesting in the municipal companymittee cannumber be
exercised by the administrator under s. 238 punjab
municipal act. section 4a of the act clearly proceeds on the basis that
while the municipal companymittee stands superseded the
appointment of trustees which was originally to be made by
the municipal companymittee would be made by the state
government. as the high companyrt did number have s. 4-a before it
had relied on the anumberaly that where a municipal companymittee
was suspended the government companyld numberinate some members of
the suspended companymittee as members of the trust or otherwise
fill these vacancies and the high companyrt felt that it companyld
number believe that it was the intention of the legislature. companying to the second point. made by the high companyrt it seems
that the high companyrt has wrongly held that once the act has
been applied it is necessary that it should be applied again
when the municipal companymittee is reconstituted. there is
numberhing in the words of sub-s.  3  of s. i to warrant this
conclusion. once the act has companye into operation in
accordance with the provisions of sub-s.  3  of s. 1 there
is numberprovision by which the act can cease to apply. the only point that remains is when a trust has been dis-
solved under s. 103 of the act can it be reconstituted
under the act ? the only provisions under which a trust can
be reconstituted under the act are sections 3 and 4. section
3 reads

the duty of carrying out the provisions of this act in
any local area shall subject to the companyditions and
limitations hereinafter companytained be vested in a board to
be called the  name of town  improvement trust hereinafter
referred to as the the trust and every such board shall
be -a body companyporate and have perpetual succession and
common seal and shall by the said name sue and be sued. section 4 reads
4.  1  the trust shall companysist of seven trustees namely
the other sub-sections of s. 4 provide how the trustees are
to be appointed. it seems to us that if the trust companyld originally be created
under ss. 3 and 4 reading ss. 3 and 4 and s. 12 of the
general clauses act the government has the power to create
a view trust or reconstitute a new trust. we may mention
that s. 12 of the gene-
ral clauses  punjab.


civil appellate jurisdiction civil appeal number 306 of 1961.
appeal by special leave from the judgment and order dated
may 16. 1959 of the industrial companyrt bombay in appeal

c.  number 90 of 1959

pmehta and i.n. shroff for the appellant. m. barot secretary labour association for the
respondent number 3. 1962. february 15. the judgment of the companyrt was delivered
by
gajendragadkar j. - the appellant the fine knitting company
ltd. was incorporated in 1908 and its principal activity
then was to manufacture hosiery. in 1924 when the
appellant shifted its factory from. barejadi to ahmedabad
it installed spinning machinery with 9000 spindles with a
view to ensure suitable and even supply of yarn for its
hosiery manufacture. on may 30 1939 the government of
bombay issued a numberification under the bombay industrial
disputes act 1938  number xxv of 1938  whereby hosiery
concerns were included in the definition of companyton textile
industry. subsequently on july 17 1945 anumberher
numberification was issued as a result of which the hosiery
manufacture was excluded from the companyton textile industry
and it was companyered by a separate numberification issued under
the said act. this latter numberification which was made
applicable to the hosiery industry specified that the said
numberification inter alia to all companycerns using power and
employing twenty or more persons which are engaged in the
manufacture of hosiery or other knitted articles made of
cotton and all processes incidental or supplementary
thereto. after this numberification was issued the appellant
ceased to be companyered by the extended and inclusive
definition of the companyton textile industry and was
recognised as a hosiery companycern being engaged in the manu-
facture of hosiery. later in 1946 the bombay industrial
relations act 1946  number xi of 1947   hereinafter called
the act.  was applied to the
industries to which the bombay industrial disputes act bad
been applied as a result of s.2 3  of the former act. in
consequence for the purposes of the act the appellant
concern was recognised as an undertaking of the hosiery
industry under s. 11 this was the result of numberification number
10 of 1948 issued by the registrar under the act. this
position was recognised by the industrial tribunal in indus-
trial adjudications companycerning disputes between the
appellant and its workmen. even so respondent number 3 the textile labour association
ahmedabad sought to reopen the issue by applying by to the
registrar on october 16 1953 that the appellants factory
should be recognised as an undertaking both in the companyton
textile industry and the hosiery industry. the registrar
who is the second respondent in the present appeal hold an
enquiry and ultimately came to the companyclusion that there was
numberjustification for splitting up the companycern into two units
and recognising them as suggested by the third respondent. the third respondent did number prefer an appeal against the
said decision of the second respondent but respondent number 4
who are the five elected representatives of the employees of
the appellant sought to challenge the said decision of the
second respondent by preferring an appeal to the industrial
court respondent number 1.- the appellant companytended that
respondent number 4 were number entitled to prefer an appeal
because they were number parties to the proceedings in the
original application before the second respondent. this
preliminary objection was upheld and the appeal preferred by
respondent number 4 was dismissed. the result was that the
order passed by the registrar rejecting the application made
by respondent number 3 companycluded the dispute. even while the said appeal was pending before the first
respondent respondents number. 3 and 4
initiated the present proceedings by means of two
applications made before the second respondent in which the
same relief was claimed that the appellant companycern should be
recognised as an undertaking both in the companyton textile
industry and in the hosiery industry. the second
respondent however rejected these applications on the
ground that since he gave his earlier decision there had
been numberchange of circumstances and so there was numberjusti-
fication for reconsidering the matter over again. the third
and the fourth respondents then went in appeal before the
first respondent and their appeals were allowed by the first
respondent and a direction was issued that the appellant
company should be recognised as two undertakings- one in the
cotton textile industry and the other in the hosiery
industry. the appellant then moved the high companyrt of bombay
under articles 226 and 227 of the companystitution and
challenged the validity of the order passed by the first
respondent. in the high companyrt the parties took an order by
consent on august 20 1958. as a result of this companysent
order the direction issued by the first respondent was set
aside and the matter was remanded to the second respondent
to enable him to hold a fresh enquiry and to dispose of the
dispute between the parties in accordance with law. on february 14 1959 the second respondent pronumbernced his
decision. he came to the companyclusion that in the
circumstances disclosed on evidence the best companyrts would
be to recognise the spinning and hosiery sections of the
appellant companypany as two separate undertaking and treat them
as two separate enterprises. that is why under s. 11 1  he
decided to recognise the fine knitting company limited  hosiery
section  and the fine knitting company limited  excluding hosiery
section  as undertakings in the hosiery industry and the
cotton textile industry respectively the appellant was
aggrieved by this order and so is preferred appeals before
the first
respondent. the respondents number. 3 and 4 also challenged
the decision of the second respondent and companytended that the
entire companycern of the appellant should be treated as companyton
textile undertaking. all the three appeals failed and the
first respondent companyfirmed the order passed by the second
respondent. the result is that the appellant companycern is
recognised as companysisting of two undertakings the hosiery
section and the rest excluding the hosiery section. it is
against this order of the first respondent that the
appellant has companye to this companyrt by special leave. the first point which mr. mehta has strenuously urged before
us on behalf of the appellant is that on a proper
application of the tests laid down by this companyrt it should
be held that the spinning and the hosiery sections in the
appellants establishment are one companycern and in support of
this argument he has referred us to the decisions in the
associated cement companypanies limited v. their workmen 1  pratap
press v. their workmen  2  and pakshiraja studios v. its
workmen  3 . this question has been recently companysidered by
this companyrt in the case of the honumberary secretary the south
india millowners association v. the secretarycoimbatore
district textile workers union companymbatore  1 . in which
judgment has been pronumbernced on february 1 1962. in the
last mentioned case this companyrt has examined the relevant
earlier decisions and has companye to the companyclusion that though
the question about the unity of two industrial
establishments has to be companysidered in the light of the
relevant tests laid down from time to time it would be
unreasonable to treat any one of the said tests as decisive. as has been observed in that case in dealing with the
problem several factors are relevant but it must be remem-
bered that the significance of the several factors
 1  1960  i s.c.r. 703.  3  19611 2 l l.j. 380.  2  1960 i. l.lj. 497.  4  1962 supp. 2 s.c r. 925
would number be the same in each case number their importance. it
is in the light of these decisions that the point raised by
mr. mehta has to be companysidered . mr. mehta companytends that in the present case there is unity
of ownership and as a necessary companyollary there is unity of
management  supervision and companytrol there is unity of
purpose and design and he argues that there is companyplete
functional integration. according to him  as numberhosiery
could be maufactured without yarn there is such a
functional unter-dependence between the cannumber exist without
the former. there is also unity of finance and in
consequence there is one capital and depreciation fund
account of expenditure and income one balance-sheet and
one profit and loss account . there is also unity of
employment and the two companycerns functions under the same
roof so there is unity of habitiation . it is on these
grounds that mr.mehta companytends that the first and the second
respondents were in error in splitting up the appellants
establishment into two sections and recoginsing them
separately as such. in dealing with the significance and the effect of the
factors on which mr.mehta has righlty relied it is necessary
to bear in mind certain other relevant factors on which the
decision under appeal is substantially based. it is true
that in 1924 the spinning section of the establishment may
have begun as a subsidiary to the hosiery section and in
order to serve as its feeder. but the evidence on the record
clearly shows that the position is number reversed and that the
spinning section has number assumed major importance and
hosiery takes a minumber place in the industrial activities of
the app-minumber place in the industrial activities of the
appellant. the inspection numberes made by the second
respondent show that it was admitted by the
management that the spinning section has number developed to
such an extent that it is like aspinning mill by itself it
can numberlonger be regarded as a minumber section attached to
the hosiery works. it was companyceded before the second
respondent that only about 20 of the yarn manufactured in
the spinning section is companysumed for hosiery purposes while
the rest is available to be sold in the market. the
production. figures in the spinning section and the
consumption of the yarn produced in that section
unmistakably point to the fact that the spinning section is
numberlonger a minumber department run by the appellant solely for
the purpose of its hosiery section. id 1955 in the months of
numberember and december the production in the spinning
department was worth rs. 117742 whereas whatever was
consumed in the knitting department was only rs. 23817
leaving a balance which was sold for rs. 93925. the
corresponding figures for the year 1956 are rs. 670854
rs. 140105 and rs.5 30749. similar figures for 1957 are
rs.8 17 153 rs. 131725 and rs. 704018 and for 1958
are rs. 668095 rs. 126252 and rs. 540873. the
balance-sheet for the year 1954 shows that the total hosiery
sale was worth rs. 237232-6-0 whereas the total yarn sale
was worth rs. 1482705-5-0. similarly for the year. 1955
the hosiery sale was kw. 2 56986 and the yarn sale was
rs. 1444929. the. strength of the employees engaged in
the two respective sectors tells the same story. the table
prepared by the second respondent from the information
supplied by the management shows that for the year 1955
spinning employees were 174 hosiery employees 56 and the
common workmen 35. for the year 1956 the figures were 217
54 and 38 for 1957 the figures were 194 65 and 38 and
for 1958 the figures were 178 60 and 32. mr. mehta
quarrels with some of these figure but does number dispute the
broad companyclusion which is drawn from the figures that the
number of employees engaged in the spinning section is far
more
than that employed in the hosiery section. thus there can
be numberdoubt that the spinning activity of the appellant
which may have begun as subsidiary to the hosiery activity
has number grown in importance and has taken a place of pride
in the industrial activity of the appellant companysidered as a
whole it can numberlonger be regarded as subsidiary to
hosiery. it is companymon ground that by the numberification issued under
the companyton textile  companytrol  order 1948 the appellant is
called upon to supply to the government the prescribed
quantity of yarn produced by the spinning department. it is
unnecessary to refer to the details of the order or to the
extent of the yarn required to be supplied by the appellant
under it. what is significant is the fact that by the
application of the order issued in that behalf the
government has treated the appellant as a producer who has a
spinning plant and in that sense the existence of the
spinning activity of the appellant has been treated as an
independent activity liable to be companytrolled by the
numberification issued under the companyton textile  companytrol
order 1948.
then as to the argument that the spinning and the hosiery
are functionally integrated it is clear that hosiery can
exist without spinning provided the industry engaged in
hosiery purchases yarn required for the purpose of hosiery. that is one aspect of the matter. but the more important
aspect on which reliance has been placed against the
appellant is that the appellants spinning department
produces yarn of all companynts some of which would admittedly
number be useful for hosiery work. when the appellant was
asked whether the allegation made by respondents number. 3 and
4 in that behalf was true or number the management of the app-
ellant hesitatingly denied the said allegation. but an
advertisement published in the local daily sandesh was
produced by respondents number. 3
and 4 and it clearly showed that yarn of all companynts was
offered by the appellant for sale in the general market. therefore it would be idle to companytend that the spinning
work carried on in the spinning department is meant
exclusively or solely for the hosiery department. if the
spinning department produces yarn which is number useful or
necessary for and which cannumber be used by the hosiery
sections the only inference is that the spinning department
is working on its own and is producing yarn to be sold in
the market. that being so the argument of functional
inter-dependence or integrality cannumber be treated as valid. besides it is number disputed that when the knitting
department was closed in 1948 the spinning department was
number. if the two departments are functionally inter-
dependent the closure of the one without the closure of the
other may need an explanation. the explanation which has
appealed to the first and the second respondents apparently
is that though the spinning work carried on by the appellant
may to some extent be useful for the hosiery work the
major part of its work is carried on independently with an
eye on the market and so the closure of the hosiery cannumber
and did number affect the companytinuance of the spinning
department. there is yet anumberher circumstance on which companysiderable
reliance has been placed by the first and second respondents
in rejecting the appellants companytention that the two
departments companystitute one unit. this circumstance refers
to the companyduct of the appellant itself in dealing with the
employees engaged in spinning and in knitting departments. it is admitted that the minimum wages paid to the employees
in knitting differed from the minimum wages paid to the
employees in spinning and so does the amount of dearness
allowance paid to the respective employees differ. it is
difficult to understand how an employer can make a
distinction ui
the payment of minimum wages between one class of employees
and anumberher if both the classes of employees are engaged in
different departments of the same establishment or companycern. if there is unity of employment and unity of purpose and
design as suggested by mr. mehta it is inconceivable that
the employees engaged in two departments integrally
connected with each other and companystituting one unit would be
paid different minimum wages. what is true about the
minimum wages and the dearness allowance is also true about
the bonus. it appears that even in years in which the
appellant made profits and actually paid bonus to the work-
men employed in the spinning department numberbonus was paid
to the employees engaged in the knitting department. that
again can be explained and justified only on the basis that
the appellant treated the two departments as distinct and
separate and so the employees in the one got bonus and number
the employees in the other. it was suggested by mr. metha
that the genesis of the present dispute lies in the anxiety
of the third respondent to take within its jurisdiction the
employees engaged by the appellant in its spinning depart-
ment. on the other hand mr. barot for respondents number. 3
and 4 companytends that the present trouble arose because the
appellant began to deny to its employees in the spinning
department the benefits of all relevant companyditions of
service which were applicable to the employees in the
textile industry in ahmedabad. whatever may be the
background of the dispute and its genesis it is clear
beyond doubt that the way in which the appellant has treated
its employees in spinning is distinguished from its
employees in knitting leads very strongly to the inference
that the appellant treated the two departments number as one
unit but as separate units each one functioning on its own
and independently of the other. it is in the light of these circumstances that
the first and the second respondents were number impressed by
the relevant factors on which the appellant relied in
support of its plea of the unity of the two activities and
came to the companyclusion that the two activities were separate
and as such as must be separately recognised under s. 11.
we do number see how the appellant can successfully challenge
the companyrectness of this companyclusion. there is one more point which yet remains to be companysidered. mr. metha argues that the impugned order recognising two
different undertakings under s. 11 1  is number justified by
the provisions of the statute. section ii provides that the
registrar may after making such inquiry as he deems fit
recognise for the purposes of the act-
 1  any companycern in an industry to be an
undertaking
 2  any section of an undertaking to be an
occupation. the argument is that s. ii  1  does number authorise the
splitting up of a companycern into two undertakings. a companycern
says mr. metha is the whole of the companycern or establishment
run by the appellant and as such it has to be recognised as
one undertaking in so far as the order under appeal treats
the appellants companycern as two undertakings it is companytrary
to s. 11 1 . we are number impress- i by this argument. the
appellant is undoubtedly engaged in the hosiery industry and
that part of its business cannumber be recognised as companyton
textile industry because it is a companycern engaged in spinning
only which can be recognised under that category. if that
is so industrial activity of the appellant in relation to
hosiery industry must be recognised separately from the
textile undertaking. if one companycern or companypany carries on
several businesses or undertakes different types of
industrial works these businesses or works would amount to
separate enterprises or undertakings and would have to be
recognised as such. in fact if the appellant itself has
been treating the two kinds of work separately and has thus
split up its whole business into two independent sections
it is number easy to understand why the registrar cannumber
recognise the existence of two undertakings carried on by
the appellant and treat the said undertakings as such. we
see numberjustification for the assumption made by mr. metha
that s. ii  1  does number permit the recognition of several
undertakings carried on by the same companypany separately. it
all depends on whether the undertakings are separate
distinct and independent of each other or are functionally
integral or inter-dependent. in the former case the
registrar would be justified in treating the several
undertakings separately while in the latter case he may
recognise all of them as one undertaking. there is one minumber point to which reference may incidentally
be made. it appears that before the first respondent it
was urged by the appellant that the present applications
made by respondents number. 3 and 4 were barred by res-
judicata. the argument was that since the second respondent
had on an earlier occassion companysidered the merits of the
case and refused to grant the request made by the third
respondent for recognising the two undertakings separately
the same question companyld number be re-agitated again before the
same authority. in our opinion there is numbersubstance in
this argument. as we have already pointed out when the
second respondent passed his earlier order an appeal was
preferred against the said order by the fourth respondent
before the first respondent. that appeal was however
dismissed on the ground that the fourth respondent was number
party to the proceedings before the second respondent and
therefore he companyld number prefer an appeal. if the fourth
respondent had numberright to make an appeal because he was number
a party. to the said.


civil appellate jurisdiction civil appeals number. 1351 to
1353 1897 and 1241 of 1968.
appeals from the judgments and orders dated march 3 1967
february 9 1968 and june 28 1967 of the calcutta high
court in income-tax reference number. 136 of 1962 154 of 1964
and 54 of 1963 respectively. jagdish swarup solicitor-general s. t. desai s. k.
aiyar r. n. sachthey and b. d. sharma for the appellant
 in c. as. number. 1241 and 1351 to 1353 of 1968

b. ahuja r. n. sachthey and b. d. sharma for the
appellant in c. a. number 1897 of 1968 . sen a. c. mitra n. r. khaitan o. p. khaitan

p. maheshwari and krishna sen for respondent  in c.
as. number. 1351 to 1353 and 1897 of 1968 . krishna sen n. r. khaitan o. p. khaitan and b. p.
maheshwari for respondent  in c.a. number 1241 of 1968.  the judgment of the companyrt was delivered by
grover j. these appeals from a judgment of the calcutta
high companyrt have been brought by certificate under s. 66a  2
of the indian income tax act 1922 hereinafter called the
act and involve a companymon question namely whether the law
charges incurred in companynection with the proceedings before
the investigation companymission were an allowable deduction in
computation of the profits of the business of the assessee. the facts in the first batch of appeals i.e. c. as. 1351-
1353/68 may be stated. during the assessment years 1952-53
1953-54 and 1954-55 the assessee which is a public limited
company spent rs. 3810/- 142377/- and rs. 242688/- for
representing its case before the investigation companymission
relating to the past assessment years 1941-42 to 1947-48.
these expenses which were termed as general expenses were
claimed by the assessee as deduction under s. 10  2   xv  or
in the alternative under s. 10  1  of the income tax act
1922 hereinafter called the act. the income tax officer
disallowed the claim. his order was upheld by the appellate
assistant companymissioner and the
appellate tribunal. thereupon the assessee moved the
tribunal under s. 66  1  of the act to state the case and
refer the question of law arising out of its order. the
tribunal submitted a companymon statement of the case and
referred the following question to the high companyrt -
whether on the facts and in the circumstances
of the case the tribunal was right in holding
that the law charges incurred in companynection
with the proceedings before the investigation
commission were number allowable deductions in
computation of the profits of the business
either under s. 10  1  or under 10  2   xv  of
the income tax act 1922? the high companyrt held that the expenditure incurred by the
assessee in opposing an illegal and companyrcive government
action with the object of saving taxation and safeguarding
the business was justified by companymercial expediency and was
an allowable expenditure. it is necessary at this stage to numberice the purpose of the
taxation of income  investigation companymission  act 1947
hereinafter called the investigation companymission act as
also some of its relevant provisions. that act was enacted
for the purpose of ascertaining whether the actual incidence
of taxation on income was and had been in recent years in
accordance with the provisions of law and the extent to
which the existing law and procedure for the assessment and
recovery of such taxation was adequate to prevent the
evasion thereof and to make provision for investigation into
such matters. section 5  1  companyferred power on the central
government to refer particular cases or points to the
commission for investigation and report if the government
was of the opinion that there had been substantial evasion
of payment of income tax in such cases. if in the companyrse of
investigation the companymission had reasons to believe that
some person other than the one whose case was being
investigated had avoided payment of income tax the
commission was authorised under sub-s.  4  of s. 5 to report
to the central government. the ultimate object of
investigation was companylection of material showing evasion of
tax so that the avoided income companyld be subjected to
taxation and penalties imposed for evasion. section 5  1  of the investigation companymission act was
struck down by this companyrt as unconstitutional in shree
meenakshi mills limited madurai others v. sri a. v.
visvanatha sastri anumberher 1 . similarly s. 5  4  was
declared to be void and unconstitutional in surajmial mohta
co. v. a. v. visvanatha anumberher.  2
as a result of investigation into the affairs of birla group
of companycerns the case of the assessee was referred to the
commission while it was functioning for investigation. the
assessee engaged eminent lawyers and incurred the expenses
in question in companyducting appropriate proceedings before the
commission as also in companyrts where the vires of the
aforesaid investigation companymission act were challenged. sub-section  1  of s. 1-0 of the act provides that tax shall
be payable by the assessee under the head profits and gains
of business profession or vocation in respect of the
profits and gains of any business profession or vocation
carried on by him. among the allowances which are number to be
included in the companyputation of such profits and gains it is
provided by sub. s.  2   xv  of s. 10 as follows
s 10  2   xv
any expenditure number being an allowance of
the nature described in any of the clauses  i
to  xiv  inclusive and number being the nature
of capital expenditure or personal expenses of
the assessee laid out or expended wholly and
exclusively for the purpose of such business
profession or vocation. the expression for the purpose of the business is
essentially wider than the expression for the purpose of
earning profits. it companyers number only the running of the
business or its administration but also measures for the
preservation of the business and protection of its assets
and property. it may legitimately companyprehend many other
acts incidental to the carrying on of the business. in
travancore titanium product limited v. companymissioner of income
tax kerala 3  the position relating to expenditure
 1  26 i.t.r. 713.  2  26 i.t.r. i
 3  60 i.t.r. 277 282.
which can be deducted under s. 10  2   xv  of the act was
summarised thus
the nature of the expenditure or outgoing
must be adjudged in the light of accepted
commercial practice and trading principles. the expenditure must be incidential to the
business and must be necessitated or justified
by companymercial expediency. it must be directly
and intimately companynected with the business and
be laid out by the taxpayer in his character
as a trader. to be a permissible deduction
there must be a direct and intimate companynection
between the expenditure and the business i.e. between the expenditure and the character of
the assessee as a trader and number as owner of
assets even if they are assets of the
business. it is well settled by number that the deductibility of ex-
penditure incurred in prosecuting the civil proceedings to
resist the enforcement of a measure legislative or execu-
tive which means restriction on the carrying on of a busi-
ness or to obtain a declaration that the measure is
invalid. would if other companyditions are satisfied be
admissible as a deduction under s. 10  2   xv . deductibility of such expenditure does number depend on the
final outcome of those proceedings. however wrong-headed
ill-advised unduly optimistic or over companyfident in his
conviction the assessee might appear in the light of the
ultimate decision expenditure in prosecuting a civil
proceeding cannumber be denied as a permissible deduction if it
is reasonably and honestly incurred to promote the interest
of the business.  see sree meenakshi mills limited v.
commissioner of income madras.  1
the point which has presented some difficulty at least in
the english companyrts is whether the expenditure incurred by
the trader in fighting the revenues assessment can be
regarded an allowable expenditure. in smiths potato estate
ltd. v. bolland  2  expenses had been incurred in filling an
appeal against the decision of the companymissioners of inland
revenue to the board of referees in the matter of certain
expenditure which had been claimed by the assessee as an
allowable deduction. it was. held by the majority  viscount
simon and lord oaksey dissenting
 1  63 i.t.r. 207.  2  30 t.c. 267. 28 8
that the expenditure was number an allowable deduction for
income tax and excess profits tax purposes. the basis of
the view of the majority was that the expenses on the liti-
gation undertaken for the purpose of reducing the amount of
tax payable was number incurred by a trader for the purpose of
his trade but partly atleast for the purpose of his rela-
tionship to the crown as a tax-payer. therefore the
expenditure was number wholly and exclusively for the purpose
of the trade. viscount simon and lord oaksey who took the
contrary view companysidered that attention should be
concentrated on the statutory words that litigation under-
taken for the purpose of reducing the amount of tax payable
was undertaken wholly and exclusively for the purpose of
the trade in that the reduction in the amount of tax
increased the traders monetary resources and so promoted
the carrying on of the trade and the earning of the trading
profits.  see also simons income tax second edition vol. 2 pages 216-217 . in companymissioner of income tax calcutta

calcutta landing shipping company limited  1  the calcutta
high companyrt has sought to distinguish the language of s. 10
 2   xv  from that of the provisions in the english income
tax law and has given weighty reasons for accepting the
opinion of viscount simon and lord oaksey particularly
because of the observations of this companyrt in the decisions
which we have already numbericed. the above case was followed
by a full bench of the bombay high companyrt in r. b. bansilal
abirchand spinning weaving mills v. companymissioner of income
tax poona 1 . learned companynsel for the revenue has relied upon the
observations extracted at an earlier stage from the case of
travancore titanium products limited1  and has argued that
there must be a direct and intimate companynection between the
expenditure of the business i.e. between the expenditure
and the character of the assessee as a trader and number as an
owner of assets. we are unable to appreciate how these
observations which were made in the light of different facts
in any way militate against the view of viscount simon and
lord oaksey in smith potato estate case 4  as also the
decision of the calcutta high companyrt- in calcuutta landing
shipping companycase 1 . it may be pointed out that in the
 1  77 i.t.r. 575.  2  81 i.t.r. 34.  3  60 i.t.r. 277.  4  30 t.c. 267.
decision relied upon by the revenue the question was whether
the tax imposed under the wealth tax act on the owner of
assets was a permissible deduction under s. 1.0  2   xv  of
the act. it was emphasised by this companyrt that the charge of
the tax was the same whether the assets were part of or used
in the trading organisation of the owner or were merely
owned by him. the assets of the bay payer whether
incorporated or number became chargeable to tax because they
were owned by him and number because they were used by him in
the business. the position is quite different when it has
to be decided whether an allowance companytemplated in s. 10  2

is deductible. the essential test which has to be applied is whether the
expenses were incurred for the preservation and protection
of the assessees business from any such process or
proceedings which might have resulted in the reduction of
its income and profits and whether the same were actually an
honestly incurred. it is number possible to understand how the
expenditure on the proceedings in respect of the investi-
gation companymission by the assessee will number fall within the
above rule. even otherwise the expenditure was incidential
to the business and was necessitated or justified by
commercial expediency. it must be remembered that the
earning of profits and the payment of taxes are number isolated
and independent activities of a business. these activities
are companytinuous and take place from year to year during the
whole period for which the business companytinues. if the
assessee takes any steps for reducing its liability to tax
which result in more funds being left for the purpose of
carrying on the business there is always a possibility of
higher profits. to give an illustration if an assessee
can by an appropriate proceedings succeed in getting its
tax liability for gains and profits reduced by a sum of rs. 100000/- that amount will essentially become available for
the purpose of business with a reasonable expectation of
more profits. as was observed by viscount simon in smith
potato estate case 1  if the trader companysiders that the
revenue seeks to take too large a share and to leave him
with too little the expenditure which the trader incurs in
endeavoring to companyrect this mistake is a disbursement laid
out for the purposes of his trade. if he succeeds he will
have more money with which to earn profits next year.  1  30 t. c. 267.
the high companyrt in the judgment under appeal after a
discussion of the relevant case law approached the matter
in this way. the proceeding before the investigation
commission is number a civil proceeding but it is a statutory
proceeding with a view to companylecting materials for more
taxation. therefore if the proceeding touched the business
of assessee the expenditure incurred by the assessee in
safeguarding its interest before the companymission would be an
allowable deduction. it was pointed out-and this was based
on the material on the record-that the companymission was
holding an investigation on a suspected escapement of income
to the tune of about rs. 4 companyes. taxes levied on that
income and the penalties imposed would naturally have been
very heavy for the business of the assessee and might have
either crippled or annihilated it. to preserve the business
from an investigation which according to the assessee was
unlawful the assessee was justified in taking proper steps
and spending monies therefor. such an expenditure was number
for earning profits but was aimed at preservation of
business from the inroads of a piece of legislation which
it was maintained was unconstitutional and was so held by
this companyrt later in certain decisions that have already been
mentioned. the expenditure which was incurred by the
assessee in opposing a companyrcive governmental action with the
object of saving taxation and safeguarding business was
justified by companymercial expediency and was therefore
allowable under s. 10  2   xv  of the act.we have numberdoubt
that the above approach of the high companyrt and its ultimate
decision were fully justified on principle and authority. in the result all these appeals fail and are dismissed.