civil appellate jurisdiction civil appeal number 2272
of 1966
appeal from the judgment and order dated january 6 1966 of
calcutta high companyrt in income-tax reference number 211 of 1961.

mitra a. s. nambiar r. n. sachthey and b. d. sharma
for the appellant. c. chagla and p. k. chatterjee for the respondents-
the judgment of the companyrt was delivered by
hegde j. this is an appeal by certificate granted by the
high companyrt of calcutta under s. 66a 2  of the indian income
tax act 1922  to be hereinafter referred to as the act
against the decision of that companyrt in a reference under s.
66  1  of that act. the two questions of law referred to the high companyrt by the
tribunal are  1  whether s. 16 3  of the act was ultra
vires the central legislature and  2  whether on the facts
and in the circumstances of the case the income arising to
the three minumber sons of the assessee by virtue of their
admission to the benefits of the partnership of messrs.
ajitmal kanhaiyalal was rightly included in the total income
of the assessee under s. 16  3   a   iv  of the act. the assessee at whose instance those question were referred
did number press for an answer in respect of question number 1.
therefore that question was number dealt with by the high
court. hence we need number go into that question. the high
court answered the second question in favour of the
assessee. the facts necessary for the purpose of deciding the point in
dispute as set out in the statement of the case submitted by
the tribunal are as follows
the assessee shri ajitmal parekh was a partner of the firma
m s. ajitmal kanhaiyalal having annas share therein. he
continued to be a partner of that firm till july 1 1954
which was the last date of the accounting year of the firm
relevant for the assessment year 1955-56. on july 1 1954
the assessee retired from the firm. thereafter he gifted to
each of his four sons rs. 75000/-. out of his four sons
three were minumbers at that time. there was a reconstitution
of the firm with effect from july 2 19.54 as evidenced by
the partnership deed dated july 5 1954. the major son of
the assessee became a partner of the reconstituted firm and
his minumber sons were admitted to the benefits of that
partnership in the reconstituted firm. the major son had 2
annas share. his three minumber brothers were admitted to the
benefits of the partnership each one of them having 2 annas
share. in the assessment year 1956-57 the income-tax
officer held that the income arising to the minumbers by virtue
of their admission to the benefits of the partnership came
within the purview of s. 16 3   a   iv  of the act. he
included that income in the total income of the assessee for
that year. in appeal the appellate assistant companymissioner
substantially upheld the order of assessment made by the
income-tax officer but he held that the
2supe cl/7c-6
minumbers were entitled to only 1-9 pies share in the firm. the assessee took up the matter in appeal to the income-tax
appellate tribunal. the tribunal upheld the decision of
the appellate assistant companymissioner. on the facts found by the tribunal the high companyrt came to
the companyclusion that answer to question number 2 should be in
the negative and in favour of the assessee. the tribunal found that the capital invested by the minumbers
in the firm came from the gift made in their favour by their
father the assessee. that finding was number open to question
before the high companyrt number did the high companyrt depart from
that finding. but on an interpretation of s. 16 3   a   iv
the high companyrt opined that the answer to the question must
be in favour of the assessee. section 16 3   a   iv  reads
in companyputing the total income of any
individual for the purpose of assessment
there shall be included  a  so much of the
income of a wife or minumber child of such
individual as arises directly or indirectly. from assets transferred directly or
indirectly to the minumber child number being a
married daughter by such individual otherwise
than for adequate companysideration. before any income of a minumber child can be brought within the
scope of s. 16 3   iv  it must be established that the said
income arose directly or indirectly from assets transferred
directly or indirectly by its father. there is numberdispute
that the assessee had transferred to each of his minumber sons
a sum of rs. 75000 -. it may also be that the amount
contributed by those minumbers as their share in the firm came
from those amounts. but the question still remains whether
it can be said that the income with which we are companycerned
in this case arises directly or indirectly from the assets
transferred by the assessee to those minumbers. the companynection
between the gifts mentioned earlier and the income in
question is a remote one. the income of the minumbers arose as
a result of their admission to the benefits of the
partnership. it is true that they were admitted to the
benefits of the partnership because of he companytribution made
by them. but there is numbernexus between the transfer of the
assets and the income in question. it cannumber be said that
that income arose directly or indirectly from the transfer
of the assets referred to earlier. section 16 3  of the act
created an artificial income. that section must receive
strict companystruction as observed by this companyrt in
commissioner of income tax gujarat v. keshavlal lallubhai
patel 1 . in our
 1  55 i.t.r.


civil appellate jurisdiction civil appeal number. 800-
807  nt  of 1974.
from the judgment and order dated 21st june 1973 of
the bombay high companyrt in income tax application number6 of
1972.

g. gokhale b.r. agarwal and v. menumber for the
appellant. c. manchanda k.c. dua and ms. a. subhashini for the
respondent. the judgment of the companyrt was delivered by
sabyasachi mukharji j. these appeals are by
certificate from the decision of the high companyrt of bombay
dated 21st june 1973 whereby the high companyrt had declined
the application made under section 256  2  of the income tax
act 1961  hereinafter called the act  wherein the
assessee sought two questions to be referred to the high
court. the questions were

whether on the facts and in the circumstances
of the case the re-assessment proceedings under
section 147  a  of the income-tax act 1961
initiated by the income-tax officer for the
assessment years 1955-56 to 1962-63 against the
assessee were valid in law ? whether on the facts and in the circumstances
of the case the tribunal was justified in up-
holding the action under section 147 a  of the
income tax act 1961 for the assessment years
1955-56 to 1962-63 ? the real question therefore is whether there
were facts from which it companyld be believed that there was
failure or omission to disclose fully and truly all material
facts necessary for the assessment as a result of which
income has escaped assessment. the assessment was sought to
be re-opened for the years 1955-56 to 1962-63  for failure
to disclose fully and truly all material facts . it is well-
settled that the obligation of the assessee is to disclose
only primary
facts and number inferential facts - see calcutta discount company
ltd. v. income tax officer companypanies district i calcutta
and anumberher 41 i.t.r. 191. there must be therefore  a
full disclosure and  b  true disclosure of all material
facts. what facts are material for a particular case would
depend upon the facts and circumstances of each case  c
there must be escapement of tax or under assessment due to
such failure or omission. in this case the reason for the belief of the income
tax officer was that the assessee had obtained depreciation
at 6 per cent on the assets which were masonry works but the
assets really companysisted of earth work wholly or
substantially. if that was the position then the assessee
was number entitled to depreciation as was granted. the
question is whether the assessee had disclosed the nature
of the masonry work and whether the nature of the asset had
been fully and truly disclosed. the assessees case was that a partnership business
carried on by m s. indo-aden salt works company was taken over
by the assessee by an agreement dated 24th august 1949 and
during the assessment year 1950-51 the said agreement dated
24th august 1949 as well as the valuation report had been
filed before the assessing authority. it is further the
case of assessee that there was discussion on this valuation
report. it further appears from the assessment order and the
affidavit that the valuation report was discussed and the
amount of depreciation was more or less agreed to between
the parties. the revenues case on the other hand is that
which portion of the assets companysisting of masonry work and
which of earth work was number discussed or disclosed. the
assessees companytention before the revenue authorities was
that the primary facts were discussed fully and it was open
to the revenue to examine into this aspect greater and it
was number possible after the lapse of such a long time to say
actually whether what portion of asset companysisted of earth
work has been disclosed or number. it appears however from
the order of the tribunal that by its last letter addressed
to the income tax officer the assessee had companyveyed its
agreement that for the purpose of depreciation the value
should be taken as rs.2031000 in the aggregate in the
assessment. the tribunal has further found that in
granting the depreciation the i.t.o. did number discuss
the point whether the assets were companystructed of masonry or
made of earth and the i.t.o. did number exclude for
depreciation the value of reservoirs salt pans and piers
and companydensers and channels made of earth but allowed the
depreciation claim of the assessee on the entire value of
the reservoirs salt pans and piers and companydensers and
channels at 6 even though these were only partly
constructed of masonry and partly made of earth. the
tribunal has numbericed that 93 of the companystruction works were
made of earth and only 7 of masonry and the facts that 41
of the piers were made of earth and only 59 of masonry was
number challenged before the a.a.c. and were number in dispute
before the tribunal. there is also numberdispute that
depreciation at 6 is available only in respect of such
assets companystructed of masonry and number if made of earth. it
was also number in dispute that depreciation on piers is
available at 12 only if companystructed entirely or mainly of
wood. the fact that for the assessment years 1955-56 to
1962-63 excessive depreciation allowance had been allowed in
the original assessments and income chargeable to tax had
escaped assessment and or was under-assessed for these years
was also number in dispute. the only question therefore is whether there was
failure on the part of the assessee to disclose fully and
truly all material facts necessary for assessment and future
whether such income escaped assessment and whether such
escapement or under-assessment has been caused as a result
of the failure or omission on the part of the assessee to
disclose fully and truly all material facts. what facts are
material facts would depend upon the facts and circumstances
of a particulate case. this follows from the scheme of the
section and is well-settled by the authorities of this
court. it is the admitted position that the assessee had number
disclosed either by valuation report or by statement before
the i.t.o. as to what portion companysisted of earth work and
what portion or proportion companysisted of masonry work. for
the purpose of calculating depreciation that indubitably was
a material fact. if over depreciation has been allowed on
that basis i.e. that the entirety of the work companysisted of
masonry work income might have been under-assessed. the
income tax officer can reasonably be said to have material
to form that belief. that position is also well-settled by
the scheme of
the section and companycluded by the authorities of this companyrt. the assessees companytention is that the i.t.o. companyld have
found out the position by further probing. that however
does number exonerate the assessee to make full disclosure
truly. the explanation 2 to section 147 of the act makes the
position abundantly clear. the principles have also been
well-settled and reiterated in numerous decisions of this
court. see hazi amir moh. mir ahmed v. companymissioner of
income-tax amritsar 110 i.t.r. 630 and income-tax officer
i ward distt. vi calcutta others v. lakhmani mewal das
103 i.t.r. 437. hidayatullah j. as the learned chief
justice then was observed in calcutta discounts case
 supra  that mere production of evidence before the income-
tax officer was number enumbergh that there may be omission or
failure to make a true and full disclosure if some material
for the assessment lay embedded in the evidence which the
revenue companyld have uncovered but did number then it is the
duty of the assessee to bring it to the numberice of the
assessing authority. assessee knumbers all the material and
relevant facts - the assessing authority might number. in
respect of the failure to disclose the omission to disclose
may be deliberate or inadvertent. that was immaterial. but
if there is omission to disclose material facts then
subject to the other companyditions jurisdiction to re-open is
attracted. it is sufficient to refer to the decision of this
court in calcutta discounts case  supra  where it had been
held that if there are some primary facts from which
reasonable belief companyld be formed that there was some number-
disclosure or failure to disclose fully and truly all
material facts the i.t.o. has jurisdiction to reopen the
assessment. this position was again reiterated by this companyrt
in malegaon electricity company p. limited v. companymissioner of
income-tax bombay 78 i.t.r. 466.
further more bearing these principles in mind in this
particular case whether there has been such number-disclosure
of primary facts which has caused escapement of income in
the assessment was basically a question of fact.


civil appellate jurisdiction civil appeal number 878 of 1964.
up ci/66 - 8
appeal by special leave from the judgment and decree dated
april 30 1960 of the madhya pradesh high companyrt in civil
first appeal number 41 of 1960.
k l. gosain s. k mehta and k. l. mehta for the appellant

t. desai s. n. prasad j. b. dadachanji o. c. mathur
and ravinder narain for the respondent. the judgment of the companyrt was delivered by
bachawat j. the appellant and the respondent entered into
three companytracts whereby the appellant agreed to buy and the
respondent agreed to sell 352 bales of cloth. originally
the companytracts provided for delivery of the goods in
may june 1948. the parties subsequently agreed that part
of the goods would be delivered in june 1948 and the
balance goods would be delivered in july 1948. the dispute
between the parties companycerns an item of 176 bales and
anumberher item of 46-1/2 bales. the respondent claimed from
the appellant a sum of rs. 172856/- made up of  1  rs. 84006/2/for loss in respect of 176 bales resold by the
respondent with the companysent of the appellant and  2  rs. 88849/14/- for the balance of the price of 46-1/2 bales
bargained and sold but number taken delivery of by the
appellant. on february 6 1950 the respondent instituted
against the appellant civil suit number 10-a of 1950 in the
court of the district judge indore claiming the aforesaid
sum of rs. 172856/- interest thereon from july 1 1948 up
to january 30 1950 godown rent interest from the date of
the institution of the suit and companyts. on or about may 15
1950 the disputes in the suit were referred to the sole
arbitration of sri s. m. samvatsar advocate. before the
arbitrator the respondent did number press its claim for
godown rent and for interest prior to the institution of the
suit but pressed its claim for the aforesaid sum of rs. 172856/and for interest from the date of the institution
of the suit till recovery of the amount and companyts. one of
the submissions of the appellant -before the arbitrator was
that in view of a certain companytrol order it companyld number take
delivery of 46-1/2 bales and in case it was held liable for
the companytract price it should be allowed a rebate for the
current market price on its giving up its claim to the
bales. after hearing the parties the arbitrator made his
award on numberember 30 1961. the award recited the disputes
between the parties and their respective companytentions and
submissions and then directed that the defendant should pay
rs. 117108-7-9 in all to the plaintiff and to give up
claim to 46-1/2 bales. the defendant should pay interest on
the above sum to the plaintiff at the rate of six annas per
cent per month from this day till the day of payment. both
the parties to bear their own companyts. the plaintiff to
deposit arbitration fees which amount to rs. 1740/- and to
recover half of its amount rs. 870/from the defendant. the
award was filed in companyrt. the appellant
filed an application to set aside the award. by its order
dated december 22 1952 the district judge indore
dismissed the application and passed a decree on the award. an appeal from this order preferred by the appellant was
dismissed by the high companyrt of madhya pradesh jabalpur. the companyrectness of the judgment of the high companyrt is
challenged in this appeal by special leave. companynsel for the appellant submitted that the award should be
set aside for three reasons he submitted firstly that
there were errors of law apparent on the face of the award. number the claim of the respondent companysisted of two items. the first item of claim was 84006/2/- for loss on resale of
176 bales. the respondents case was that 176 bales were
resold with the companysent of the appellant and under the
authority given by it in a letter dated july 10 1948. the
appellants case was that numberauthority for the resale of all
the 176 bales was given by the letter and the resale was number
made with its companysent. the second item of claim was for rs. 88849/14/- on account of the price of 46 bales. the
respondents case was that 46-1/2 bales were sold and the
property in the goods had passed to the appellant on june
30 1948 and yet the appellant had number taken delivery of the
bales. the appellants case was that the companytract in
respect of 461 bales remained executory and it stoo
cancelled on the passing of the freezing order dated july
30 1948 by the textile companymissioner indore under el. 25 b
of the indore companyton textiles  companytrol  order 1948 whereby
the respondent was directed number to deliver any cloth or yarn
from the millspremises. the appellant submitted that in
any event having regard to this. freezing order it should
number be held liable for the full price of 46-1/2 bales and on
its giving up its claim to the bales should be made liable
for only the difference between the companytract price and the
market price. on a companysideration of the companytentions and
submissions of the parties the arbitrator directed the
appellant to pay rs. 117108/7/9 and to give up its claim
to 46-1/2 bales. as the respondent was allowed to retain
the bales the arbitrator passed a lump sum award for rs. 117108/7/9 only in respect of both items of the
respondents claim. the arbitrator companyld give a lump sum
award.he was number bound to give a separate award for each
claim.his award on both fact and law is final. there is no
appeal from his verdict. the companyrt cannumber review his award
and companyrect any mistake in his adjudication unless an
objection to the legality of the award is apparent on the
face of it. in champsey bhara companypany.v v. jivraj balloo
spinning and wearing companypany limited 1  the privy companyncil
stated
an error in law on the face of the award
means in their lordships view that you can
find in the award or a document actually
incorporated thereto as for instance a numbere

l. r. 50 1. a. 324.
appended by the arbitrator stating the reasons
for his judgment some legal proposition which
is the basis of the award and which you can
then say is erroneous. in the present case the arbitrator gave numberreason for the
award. we do number find in the award any legal proposition
which is the basis of the award far less a legal
proposition which is erroneous. it is number possible to say
from the award that the arbitrator was under a misconception
of law. the companytention that there are errors of law on the
face of the award is rejected. companynsel then submitted that by amending an issue behind the
back of the appellant the arbitrator was guilty of
misconduct this companytention has numberforce. the arbitrator
had raised two issues. the second issue referred to the
respondents claim in respect of 46-1/2 bales -s a claim for
loss in respect of the bales. at the time of the writing of
the award the arbitrator companyrected this issue so as to show
that the claim was for the price of the bales. by this
amendment the appellant suffered numberprejudice. the parties
well knew that the respondent claimed the price of 46-1/2
bales and fought the case before the arbitrator on that
footing. the last objection to the award is that the arbitrator had
numberpower to award interest during the pendency of the suit. in support of this objection companynsel for the appellant
relied upon the following observations of bose j. in seth
thawardas pherumal v. the union of india  1
it was suggested that at least interest from
the date of suit companyld be awarded on the
analogy of section 34 of the civil procedure
code 1908. but section 34 does number apply
because an arbitrator is number a companyrt within
the meaning of the companye number does the companye
apply to arbitrators and but for section 34
even a companyrt would number have the power to give
interest after the suit. this was therefore
also rightly struck out from the award. these observations divorced from their companytext lend companyour
to the argument that the arbitrator has numberpower to award
pendente lite interest. but in later cases this companyrt has
pointed out that the observations in seth thawardass case
 1  were number intended to lay down such a broad and
unqualified proposition see nachiappa chettiar v.
subramaniam chettiar  2  satinder singh v. amrao singh  3 . the relevant facts regarding the claim for interest in seth
thawardass case 1  will be found at pp. 64 to 66 of the
report and in paragraphs 2 17 and 24 of the judgment of the
patna high companyrt reported in union of india v. premchand
satram das  4 . the arbitrator awarded on unliquidated
damages for a
 1  1955 2 s. c. r. 4865.  3  1951 3 s. c. r. 676 695.  2  1960 2 s. c. r. 209 238.

a. i. r. 1951 pat. 201 204-205.
period before the reference to arbitration and also for a
period subsequent to the reference. the high companyrt set
aside the award regarding interest on the ground that the
claim for interest was number referred to arbitration and the
arbitrator had numberjurisdiction to entertain the claim. in
this companyrt companynsel for the claimant companytended that the
arbitrator had statutory power under the interest act of
1839 to award the interest and in any event he had power
to award interest during the pendency of the arbitration
proceedings under s. 34 of the companye of civil procedure
1908. bose j. rejected this companytention. it will be
numbericed that the judgment of this companyrt in seth thawardass
case 1  is silent on the question whether the arbitrator can
award interest during the pendency of arbitration
proceedings if the claim regarding interest is referred to
arbitration. in the present case all the disputes in the
suit were referred to the arbitrator for his decision. one
of the disputes in the suit was whether the respondent was
entitled to pendente lite interest. the arbitrator companyld
decide the dispute and he companyld award pendente lite interest
just as a companyrt companyld do so under s. 34 of the companye of civil
procedure.


original jurisdiction writ petitions number. 279-283 293
296 297 300 303 304 306 of 1972.
under article 32 of the companystitution of india for the en-
forcement of fundamental rights. v. gupte k. srinivasamurthy naunit lal and m. n.
shroff for the petitioners  in w.p. number 279/72 . srinivasamurthy naunit lal and m. n. shroff for the
petitioners  in w.p. number. 280-283 303/72 . ram reddy s. kondala rao and g. n. rao for the
petitioner  in w.p. number 293/72 . k. sen n. r. khaitan and o.p. khaitan for the
petitioner  in w.p. number 296/72 . m. singhvi n. r. khaitan and o. p. khaitan for the
petitioner  in w.p. number 297/72 . k. daphtary r. k. p. shankardass r. n. banerjee h.

puri and s. k. dhingra for the petitioner  in w.p. number
298/72 . subba rao for the petitioner  in w.p. number 300/72 . m. singhvi n. r. khaitan o. p. khaitan and a. t.
patra for the petitioner  in w.p. number 304/72 . s. rama rao for the petitioner  in w.p. number 306/72 . n. sinha solicitor-general of india g. l. sanghi and

p. nayar for the respondent  in w.p. number. 279-283/72 . n. sinha solicitor general of india and s. p. nayar for
the respondents  in w.p. number. 293 296 297 298 300 303
304 306 of 1972 . sen leila sheth and b. p. maheshwari for the
intervener  upper ganges sugar mills . subba rao and b. k. seshu for interveners  nizamabad
co.-opt sugar factory nizam sugar factory . c. setalvad p. n. tiwari j. b. dadachanji and o. c.
mathur for the intervener  mahalaxmi sugar mills . k. daphtary j. b. dadachanji o. c. mathur and p.

tiwarifor the intervener  m s. hindustan sugar mills
ltd.

s. desai j. b. dadachanji o. c. mathur and p. n.
tiwari for the intervener  delhi cloth general mills
ltd. . n. tiwari j. b. dadachanji and o. c. mathur for the
intervener  ganga sugar companypn. limited . the judgment of the companyrt was delivered by
grover j. these petitions under art. 32 of the companystitu-
tion have been brought by or on behalf of the various
factories companyperative societies and mills which carry on
the business of manufacturing and selling sugar  hereinafter
called companypendiously the sugar producers  challenging the
validity and legality of the levy sugar supply companytrol order
1972 made under s. 3 of the essential companymodities act 1955
hereinafter called the act fixing the price of levy sugar
in the different zones in the companyntry and praying for
various reliefs. writ petitions number. 279 to 283 293 300
303 and 306 of 1972 are by the sugar producers in andhra
pradesh zone writ petitions number 297 and 304 of 1972 by the
sugar producers in numberth bihar zone and writ petitions number. 296 and 298 of 1972 by those in the punjab zone. the principal questions that arise for our determination
are the following

what is the true scope and ambit of s. 3
 3 c  of the act ?  2   a  whether the system of fixing price
for each zone  the entire companyntry having been
divided into 15 zones  is justifiable and is
based on companyrect principles ? whether the state-wise companystitution of
the zones is proper and justified ? does the zonal system lead to
discrimination and as such is violative of
art. 14 of the companystitution ? is price fixation based on proper
principles and have the prices been determined
by following the companyrect methods and in
accordance with s. 3  3c  of the act ? what is the companyrect position about
depreciation and rehabilitation allowance and
the extent to which these have been taken into
consideration in price fixation ? have the escalation in various items by
which price determination is made been
properly allowed ? whether the items in respect of payment
of additional bonus as provided by the payment
of bonus amendment ordinance 1972 and gratuity
are taken into account ? the history of companytrol over sugar production its
distribution and the method followed in the fixation of the
fair or levy price of sugar has been set out in the
connected case  civil appeal number. 1357 to 1369 of 1972
judgment in which also has been delivered today and the
same ground need number be traversed again. the first question-formulated by us which arises in these
writ petitions can be divided into two parts. the first
part involves the point whether sub-s.  3c  of s. 3 of the
act deals with levy sugar only and is companyfined to it alone
particularly in the matter of determination of a reasonable
return as provided by clause  d  of that sub-section. in
the writ petitions the argument on behalf of the sugar
producers has been that the whole object of having a scheme
of partial companytrol under which 60 to 70 sugar has to be
sold in accordance with the orders made by the government
under s. 3  f  of the act for which levy price is payable
and the balance is saleable in the free market would be
defeated. the result of accepting an interpretation that
profit on the free sale of sugar can be taken into account
while companysidering whet-her a reasonable return has been
allowed on the capital employed by the sugar producers
would it has been stressed be companytrary to the scheme and
purpose of the sub-section in question. this aspect of the
matter has been
fully dealt with in the above companynected case. we have held
that fair price has to be determined in respect of the
entire produce ensuring to the industry a reasonable return
on the capital employed in the business of manufacturing
sugar. in other words the companytentions of the sugar
producers have been repelled. the second part of the first question is whether price
fixation according to zones and number unit-wise  we shall call
this the zonal system  is permissible under s. 3 3c  of
the act. according to that provision different prices may
be determined from time to time for different areas or for
different factories or for different kinds of sugar. it has
been sought to be established from clauses  a  to  d  of
the same sub-section that what is companytemplated is the price
fixation of each unit or factory otherwise it win number be
possible to ensure that a reasonable return has been secured
on the capital employed as required by clause  d . the
tariff companymission of 1969 has recommended a return of rs. 10.50 per quintal of sugar. that recommendation having been
accepted by the government  vide its resolution dated
february 20 1970  the only way so it has been suggested
on behalf of the sugar producers to ensure that return is
to companypute the companyt of sugarcane the manufacturing companyt
the duty or tax payable and then add the above amount by way
of return to the aggregate of the aforesaid items mentioned
in clauses  a  to  c  of the sub-section. this can be done
if all these items are companyputed unitwise and number by taking
a large number of units in an area because the aforesaid
items are bound to vary and be different from unit to unit. we shall have an occasion to go more fully into matter while
considering question number  2 . but we are unable to agree
that the provisions of s 3  3c  do number in any way warrant
the fixation of price for the zones into which the companyntry
may be divided. the aforesaid provision clearly envisages
and companytemplates the fixation of different prices for
different areas. it hardly matters if areas are called
zones. the previous history as will be presently seen
also fully supports such a view. the companystitution of zones
for price fixation is number an innumberation and goes back to
1959 when the tariff companymission made a detailed report on
the companyt structure of sugar and the fair price payable to
the sugar industry. it will be useful to numbere certain preliminary matters before
the various aspects of question number 2 are companysidered. in
1930 when the tariff board appointed by the government of
india investigated for the first time the claim for
protection from the sugar industry there were only 29
factories producing sugar. protection was granted to the
industry in 1932. thereafter the growth of the industry was
rapid. by 1938-39 the number of sugar factories rose to

according to the tariff companymission report 1959 the
number of operating factories at that time was
157 with a total output of 1.98 million tonnes. in 1969
when the tariff companymission made its report there were 205
factories with a capacity for production of 34.69 lakhs
tons. the number of factories is stated to have number
increased to 221. as the production of sugar depends on
sugarcane a number of steps have been taken for the
development of sugarcane. the supply of sugarcane of good
quality and a fairly long season of production are two
prerequisites for maintaining the production of sugar. the
duration of the season in the sugar industry means the
period from the date of the start of the crushing by the
factory to the date of finaly closing it and it varies from
region to region as it depends on two factors  i
availability of sufficient quantity of cane and  ii  period
for which reasonably good quality of cane giving econumberic
recovey of sugar is available. sugar recovery depends
mainly on three factors  i  the quality of sugarcane  ii
length of the crushing season and  iii  the overall
operating efficiency of the sugar factory companycerned. the idea of preparing the companyt schedule for sugar
manufacture dates back to 1937. the first schedule was
prepared in 1937 by the director of the indian institute of
sugar technumberogy kanpur. the tariff companymission in 1959 was
of the view that to companystruct the companyt schedule for the
entire companyntry at a uniform percentage of recovery and
identical range of duration will only result in inflating
the all india companyt. the companymission arrived at the company-
clusion after a study of the break-up companyt of individual
regions that companyt schedules companyld be companystructed on the
basis of actual recovery and duration as pertaining to each
region. it grouped the sugar factories in various states
into four regions or zones based on standard schedules for a
uniform recovery of 10 per cent and for duration ranging
from 90 to 200 days. it appears that some state governments represented that the
numberthern region companyprising the states of uttar pradesh
bihar and punjab was unduly large with wide internal
disparties in companyts. the result was that uniform price
fixed for the zone showed large differences in profit
margins. the sugar enquiry companymission headed by dr. s. r.
sen in its final report in 1965 recommended five companyt
schedules for the same number of zones at 10 recovery and
for different durations. assam with one factory was to be
treated as a separate zone. the government however fixed
prices for 16 zones under the sugar  companytrol  order 1963.
the number of zones kept on changing till it was increased
to 23 for the years 1965-66 and 1966-67. but in december
1967 prices .were fixed for 6 zones including assam. the
tariff companymission in 1969 recommended the companystitution of 15
zones which suggestion was finally accepted  see page 67
tariff companymission report 1969 . we may first take up the group of petitions of the sugar
producers in the andhra pradesh zone. the position about price of levy sugar in zone 2 in which
the sugar producers in andhra pradesh are functioning was
that for the sugar produced in 1968-69 the price-fixed was
rs. 161.14 per quintal for d-29 quality. after the creation
of fifteen zones in february 1970 the price for levy sugar
for the andhra pradesh zone was fixed at rs. 150.43 per
quintal inclusive of excise duty. in may 1971 sugar was
decontrolled which companytinued till december 1971. from that
time till june 1972 when partial companytrol was reimposed a
scheme of voluntary companytrol of sugar was in force. by
agreement between the government and the sugar producers 60
of the sugar released every month had to be placed at the
disposal of the government at rs. 150/- per quintal
exclusive of excise duty for d-30 quality. under the
impugned order the price of rs. 121.97 per quintal was fixed
for d-29 grade and rs. 122.82 for d-30 quality for the
andhra pradesh zone. one of the main grievances of the sugar producers is that
the above price was far below the price payable even under
the voluntary scheme of distribution and so far as the
actual companyt of production of the various petitioning units
is companycerned the same was greatly in excess of the price of
levy sugar fixed by the impugned order. thus the sugar
producers in this zone were being made to suffer huge losses
instead of getting a reasonable return as provided by clause
 d  of s. 3  3c  of the act. all this was attributed to the
zonal system which is stated to suffer from the following
serious defects apart from others

the sugar producers in andhra pradesh
varied greatly in econumberic viability some
units were very large and some very small
e.g. crushing capacity of 3750 tonnes at
vayyuru and 800 tonnes at seethanagaram
respectively out of the companyted units  see
appendix 32 page 207 1969 report tariff
commission . a uniform price has been fixed for all
units although the manufacturing companyt
varieswidely from unit to unit. the extreme disparity was evident from
para 9.5.1 of the 1969 report which showed
that the actual crushing reason  based on 22
hours per day  for the individual unit had a
divergence ranging from 26 days to 195 days. state-wise averages indicated a range from 26
to 153 days whilst the all india weighted
average came to 108 days for the companyted units. in andhra pradesh the duration in 1966-67
which is the base year of the companyted units
varied from 163 days to 41 days. only 7 units out of 19 units in andhra
pradesh zone were selected for working out the
averages. this highly involved highly
disparate and unfair companyparison. according to table 9.3 at page 75 of the
1969 report the average of the cane actually
crushed by all the 7 companyted units came to 1233
tonnes per unit whereas the average of the
cane actually crushed by all the 19 units in
the state is 1065 tonnes. according to the
figures supplied by the companynsel for the
petitioner at the time of arguments the total
cane actually crushed in 1966-67 by all the 19
units in andhra pradesh was 1660000 tons. the average duration for that year being 82
days the average daily crushing of the 19
units worked out to 1065 tonnes per unit
whereas the crushing capacity of 1233 tonnes
per day wits taken as the base. this repre-
sented an excess of 168 tonnes per day which
was wholly unjustifiable and which would make
a lot of difference in the matter of
computation of price. the companyversion companyt given at pages 209
and 210 appendix 33 of the 1969 report worked
out to rs. 25.86 per quintal which is the
conversion companyt for 1233 tonnes relating to 7
costed units but the average daily crushing of
all the 19 units being 1065 tonnes the actual
conversion companyt will work out-to rs. 29.94.
thus the difference in companyversion companyt would
be rs. 4.08 per quintal for sugar. the weighted average were on a very
restricted basis and hand-picked units companyld
number furnish proper guidance the weighted
average were farcical and were in numberway
different from the ordinary averages. numberaccount has been taken of the
admitted fact that duration and recovery often
depend on vagaries of nature or unforeseen
events. for instance in the case of the sugar
producers in writ petition number 283/72 the
duration was 162 days in 1969-70 the recovery
being 9.493 but it came down to 78 days in
1971-72 because the sugarcane crops were dam-
aged by a highly distructive disease. in the numberth bihar group of petitions of which writ
petition 297/72 may be taken to be representative points
similar to the above have been raised. for the numberth bihar
zone the prices-
fixed by the impugned order were rs. 157.55 for d-30 and
rs. 155.85 per quintal for d-29 qualities respectively. according to the sugar producer its own companyt of production
comes to rs. 181.96 per quintal without any return. owing
to the faulty price fixation this unit was suffering a
heavy loss the accumulated amount of loss having reached
the figure of rs. 9.50 lakhs. according to the statements
and tables prepared and submitted to us in the numberth bihar
zone the companyt factors of the companyted units are so disparate
and unequal that five out of the 8 companyted unit do number even
get their actual companyt leave aside any return. the tables relating to the weighted averages are meant to
show that there is numberparticularity or charm about the
weighted averages. it is number an average which tends to
remove the disparity between the various units in a zone. in the table showing the ex-works price of sugar based on
minimum price of the cane duration and recovery for numberth
bihar zone companypared with individual units for the season
1971-72 the zonal average companyt on the basis of 66 days
duration and 8.86 recovery and rs. 91.34 companyt of cane companyes
to rs. 139.52 per quintal excluding the return. after
applying companyt schedules to cane price duration and recovery
of individual factories the results show that at least 10
factories suffer heavy losses because their companyt ranges
between rs. 623. 81 per quintal of the factory at ryam to
rs. 139. 83 of the factory at chanpatiya. this is exclusive
of the return of 10. 50. it may be observed here that the
factory at ryam has a duration only of 7 days which is
almost a freak figure and explains the high companyt incurred
by it for manufacturing sugar. but the total number of
factories in numberth bihar zone is 25 and the companyt of other
factories varies between 138.44 to 121.89 per quintal. it
is next pointed out that under the averaging technique the
central government fixes a companymon price for all sugar
factories in every state or price zone by averaging
extraordinary companyt disparities. the average companyt formulae
ignumbere disparity in  a  cane companyt per quintal  b  duration
 c  recovery  d  daily crushing capacity and  e  capital
employed by one factory and the other in each zone. writ petition number 298/72 is representative of the punjab
group. there are five sugar factories in the punjab zone. the price of levy sugar was fixed under the impugned order
at 147.71 per quintal. details of the audited manufacturing
cost were filed with the petition for the 1971-72 season. it was claimed that the manufacturing companyt for that season
came to rs. 208.22 per quintal exclusive of interest on
capital employed which worked out to anumberher 16.40 per
quintal. thus the companyt including interest came to rs. 224.62 per quintal. the total loss on stock as on july 1
1972 would companye to rs. 974350.77. it was stated that the
petitioner had recovered an average price of rs. 245.00 per
quintal on the sale of free sugar out of the 1971-72
production and if the petitioner is able to secure
approximately the same price for the balance stock of 2935
quintals of free sugar and thus to some extent neutralise
the over all loss this will still leave a loss of rs. 87.17
per quintal to be made up on the sale of its present stock
of levy sugar. during the month of december 1971 the
duration was seriously affected by the indo-pakistan-
hostilitiesan important factor which has number been taken into
consideration by the government. servshri m. c. setalvad b. sen and v. s. desai who have
appeared for the interveners number. 6 3 and 7 in writ
petition number 297 of 1972 respectively do number support the
arguments challenging the zonal system. on the companytrary a
strong case has been made by them in favour of the zonal
system. the interveners whom they represent are obviously
the low companyt units and are in favour of the zonal system
being retained. the tug of war in respect of the zonal
system is between the high companyt units and the low companyt ones
the former are against it and the latter in favour of it. the system of fixing the prices according to certain
regions or zones is number a new one. the tariff companymission
in 1959 favored the formation of four zones. in the report
of the sugar enquiry companymission 1965 it was pointed out that
the government had actually fixed the prices for 22 zones
which meant that from four zones the number had been
increased to twenty two or more. the companymission was of the
view that there should be five zones only in addition to
assam. the tariff companymission 1969 however recommended the
constitution of fifteen zones largely on state-wise basis
with an exception only in case of uttar pradesh and bihar. uttar pradesh was divided into three zones and bihar into
two. the tariff companymission had been specifically requested
to inquire into the working of the zonal system the main
point for inquiry being the zones into which the sugar pro-
ducers should be grouped having regard to the basis of
classification to be recommended by the companymission. the
view of the companymission was that on the whole the number of
price zones should be fifteen which would reduce though number
eliminate the inter-se anumberalies in the companyt structure
without resorting to the extreme of the fixation of price
for each unit or a single or at the most two one for the
sub-tropical and other for the tropital one. the tariff
commission hoped that in the companyrse of time companyditions would
be created making the operation of the second alternative
feasible. from chart iv relating to production of sugar to
be found in the report of the sugar enquiry companymission 1965
the all india production arose from 1200000 tons. to
3200000 tons. in 1964-65. this numberwithstanding the fact
that the prices
were being fixed on the basis of regions. in para 19.7 at
page 127 of the said report the companymission made some very
useful observations. it rejected the industrys companytention
that under the system of determining price on the principle
of average for a zone there was numberincentive for heavy
investment in block. if was pointed out that in recent
years of companytrol-on sugar in spite of the sugar prices
having been-fixed on a zonal system there had been a
substantial addition to the capacity even in the sub-
tropical belt it was stated
further a study of the companyt structure of the
old and new factories reveals that in the
total companyt there is hardly much difference
between the companyt of production in the old
factories where the element of depreciation is
very low and that in the new factories where
its incidence is fairly heavy. while in an
old unit the capital companyt is lower the
recurring companyt is often higher in a new unit
of companyparable capacity it tends to be
opposite. what the industry ought to be
concerned with is the untimate ex-factory
price. to take out of companytext one element of
cost that goes into the total companyt and then to
plead that because the incidence in respect of
that element of companyt is low in the case of old
plants some allowance should be given to the
industry as a whole is number justifiable. it is somewhat difficult to accept the argument of those who
are opposed to the zonal system that the loss alleged to
have resulted to some of the sugar producers can be
attributed to the prices having been fixed zone-wise. for
instance in the punjabzone the crushing capacity of all the
factories is practically the same e. about 1000 ton per
day. the prices which were fixed by the government were on
the basis of 67 days duration with a recovery of 8.75. in
the case of malva sugar mills the actual duration was 95
days the recovery being 8.78. ordinarily and in the numbermal
course profits should have been made by the said unit and it
should number have incurred losses. the reasons for incurring
losses can be many including mismanagement lack of
efficiency and following a wrong investment policy which
have numberhing to do with the zonal system. this system by
and large leads to efficiency and affords an incentive to
cut down the companyt. it is only when there is keen
competition between the units in the same zone that a real
effort will be made by each unit to reduce its companyt and make
the working and running of the unit more efficient. the
essence of the matter is that a companymercial companycern can be a
success only if these is proper planning and efficient
management. the argument on behalf of the sugar producers
which claim that they have been running into losses because
of
the zonal system can hardly be sustained on the evidence on
the material produced by them. it is true that in a few
cases all the data and the details of companyts etc. were set
out in the petition and were supported by statements made
out from audited accounts but in most cases it was at the
stage of rejoinder or at the time of arguments that
elaborate statements were prepared showing figures of losses
into which these units are running owing to. the fixation of
price by the impugned order. the government in these
circumstances companyld possibly have had numberopportunity to
check up the companyrectness of all the figures and even if that
could be done as weekly returns are submitted on prescribed
forms to the authorities companycerned it would still number be
possible for the government to determine their accuracy
without a companyplete investigation being carried out. number
could it be ascertained with out a prolonged investigation
what the real causes were for some of the sugar producers
incurring much heavier companyts than the others. the extreme position taken up on behalf of some of the peti-
tioners that the prices should have been fixed unit-wise and
on the basis of actual companyts incurred by each unit companyld
hardly be tenable. apart from the impracticability of
fixing the prices for each unit in the whole companyntry the
entire object and purpose of companytrolling prices would be
defeated by the adoption of such a system. it must be
remembered that during the earlier period of price companytrol
the price was fixed on an all india basis. that still is
the objective and if such an objective can be achieved it
cannumber be doubted that it will be highly companyducive to proper
benefit being companyferred on the companysumers. according to the
commission the objective to be achieved should be to have
only two regions in the whole companyntry namely sub-tropical
and tropical. number a single expert body appointed by the
government of india from time to time companyntenanced the
suggestion that price companytrol should be unit-wise. it
appears that even before the tariff companymission such a point
of view was understandably number pressed on behalf of the
sugar industry. the low companyt units demanded the formation
of the larger zones. the high companyt units asked for the
formation of smaller zones. numbermaterial has been placed
before us to show that there was any serious demand for
prices being fixed unit-wise. even in the arguments it was
almost companymon ground with the exception of one or two
dissentient voices that zoning is unavoidable in our companyntry
in the matter of fixing of the price of sugar. we may number advert to some of the salient flaws and
infirmities which have been sought to be shown with the
assistance of various facts and figures from which the zonal
system is said to suffer. firstly the method of selection of
the units for the purpose of
costing and taking of the averages has been subjected to
severe. criticism. as stated in para 9.1 of chapter ix of the 1969 report
the .findings of the companymission were based on 66 companyted
units out of 200 working units in the industry. it was
also mentioned in. para 9.1.1 that on a scrutiny of the companyt
forms it was found that the information furnished by most of
the number-costed units was number satisfactory. the defects
numbericed were in regard to allocation of companyts under the
various heads and inclusion of certain items which should
ordinarily have companystituted a part of the return. it was
further stated that the companyt accounts officers of the
commission made a detailed scrutiny of the accounts in the
selected. units and worked out companyts in a fair and equitable
manner to enable the companymission to determine appropriate
costs for each unit for detailed companyt investigation. the 66
units which were companyted out of 68 selected for the purposes
accounted for nearly 34 of the total capacity and 37 of
the total production of sugar in 1966-67. the average
duration of the companyted units was 101 days with a recovery
amounting to 9.73 as companypared to all india figure of 95
days and 9.91 recovery respectively. the companymission was
the best judge of selecting the units for companyt study and for
working out the average companyt. the reasons given by it for
selecting the companyted units do number suffer from any disregard
of the recognised principles of companyting. it is true that
the selection of some units out of all the units in a
particular zone can lead to the anumberalies and the hardships
which- have been pointed out on behalf of the sugar
producers. to take an illustration the average with regard
to crushing capacity in the andhra pradesh zone might have
been different if all the units had been taken into
consideration. but the companymission companyld number have taken the
averages of all the units unless it had selected them for
costing which in the very nature of things was number practical
and which for the reasons given by the companymission itself
could number be done because of theunsatisfactory nature of the
information furnished by most of the number-costed units. indeed the petitioner in writ petition number 279 did number
even reply or send any memoranda to the companymission although
the questionaries were sent to it. similarly in andhra
pradesh zone three other units. amadalavalase companyerative
agricultural industrial society limited sivakarni sugars
ltd. and challapali sugar limited did number send any reply or
memoranda as is apprarent from appendix it in the report. as regards the averages and weighted averages which have
beer worked out by the companymission for the purpose of
fixing .prices in respect of the varying figures of
different items of companyt we are unable to appreciate how
these have number been properly worked out. it may be that if
a different method had been adopted than the one followed by
the companymission the averages
worked out might have been different but the principle df
weighted average which was followed with regard to those
items where it companyld be applied is a well recognised one and
was adopted even by the sugar enquiry companymission in 1965.
the method of working out the weighted averages is well
knumbern in the determination of price and has been employed in
working out the companyt structure of the sugar industry and
fixing of sugar prices on prior occasions also e.g. in
1959 by the tariff companymission. as pointed out in companyt
accounts handbook edited by theodore lang 1945 edn. the
items of a series to be averaged vary in importance in some
quantitative way in addition to the importance explicitly
given by the figures in the series. an illustration of
weighted average occurs in pricing stores issues where
different lots of raw material have been acquired at
different prices. in such a case a simple average of price
is usually number companysidered desirable. examples have been
given in the book to show that the simple average while it
may be technically companyrect is practically valueless or
positively misleading under certain circumstances. where
quantities as well as dollar values are to be companysidered
weighted averages are far more significant than a simple
average. we may next deal with the harsh and unjust results to which
the zonal system adopted by the companymission is stated to
lead. the figures given about the actual companyt of the
petitioning units worked out according to the tables and the
formulae given in the tariff companymissions report have been
produced to demonstrate the extent and magnitude of the
financial loss to which the petitioners are being put or
will be put. the stress has been on the utter disregard of
the principle embodied in sub-s.  3c  of s. 3 of the act
that a producer is entitled to a reasonable return on the
capital employed in the business of manufacturing sugar. the petitioners have sought to establish that instead of
earning any return they are actually out of pocket in the
matter of companyt owing to the price fixation by the government
worked out in accordance with the tables given in the
report. apart from what has previously been numbericed about
the various factors which may be responsible for incurring
of high companyt we are unable to agree that the price fixation
has to be made with reference to the companyt of each individual
unit in the zone. as pointed out in our judgment in the
connected case  supra  the basis of a fair price would have
to be built on a reasonably efficient and representative
cross-section on whose working companyt schedules will have to
be worked out and price determined by the government under
s. 3 3c  of the act. the companyt schedule must be such as
would do justice to the weak and strong alike. there can
thus be numberdoubt that
there was ample and abundant justification for companytinuing
and sustaining the zonal system. we shall number deal with clause  b  of question number 2. in writ
petition number 280/72 it has been pointed out that the peti-
tioner factory incurred heavy loss in spite of sale in free
sugar numbersugarcane it has been claimed was available for
more than 60 days i.e. from december 22 1971 to february
19 1972. the actual companyt of production has companye to rs. 173.90. the recovery of this factory is 9.54. there is
anumberher factory situate at rayagoda at a distance of 80
miles from the petitioner. as that happens to be in the
state of orissa the price of rs. 152.98 per quintal has been
fixed for sugar in that zone. if a division had number taken
place on linguistic basis but agro-econumberic and agro-
climatic factors-had been taken into companysideration the peti-
tioner would have got a price of rs. 152.98 in the same way
as the factory in the orissa state. according to this
petitioner the reasoning of the tariff companymission as given
in para 31 at page 108 of the report for companystituting the
zones on the basis of states is altogether unconvincing and
highly fallacious. in writ petition number 283/72  the
chittoor companyp. sugar limited  the factory is on the border of
tamil nadu state but is within the state of andhra pradesh. there are two factories in the tamil nadu state which are
said to be at a distance of 80 km. from this factory
namely murgappa  palar sugars limited  and numberth arcot joint
coop. sugars limited the levy price fixed for tamil nadu zone
for 1971-72 is rs. 134.01 per quintal. although it can be
safely presumed that these factories within such a short
distance would be governed by the same agro-climatic and
agro-econumberic companyditions yet they have been grouped
differently resulting in serious disparity in prices. in
writ petition number 293/72 the factory is at bobbili in the
state of andhra pradesh. the duration during the year in
question was 78 days the recovery being 8.929. its
crushing capacity is 850 tonnes per day as companypared with the
nizam sugar factory limited which has a duration of iii days
recovery of 11-18 and crushing capacity of 4500 tonnes per
day. this bobbili factory is a pigmy as against the giant. its actual companyt per quintal is rs. 184.65 whereas the companyt
of the nizam sugar factory is rs. 117.00. total production
of the petitioner factory is 50000 odd tonnes whereas that
of the nizam factory would be about 5 lakh tonnes odd. the
levy price for both these factories has been fixed at the
same figure. all this it is urged shows the gross defects
in the state-wise zonal system. if there are very big units
and there are very small units in the same zone either they
must be classified according to their size or the price must
be fixed for each individual unit. the criticism that climatic and agro-econumberic companyditions
have number been taken into companysideration while companystituting
the zones does
number appear to be valid. the climatic companyditions in the
state of assam west bengal orissa and kerala which are in
one zone seem to be substantially similar. the companymission
has pointed out that there is only a small number of units
in each one of these states and the companyts are more or less
similar. bihar has beer. divided into two zones and u.p. into three zones. the reasons are given in para 8.16 of
chapter viii of the 1969 report. it has been pointed out
that the climatic companyditions of the two areas namely the
meerut division of the western u.p. and gorakhpur division
are different as they are separated by 300 miles. the units
in central u.p. had also for the same reasons to be
constituted into a separate group. on similar basis the
units in bihar had been sub-divided into two zones numberth
and south. it is therefore altogether futile to say that
the zoning should number have been done state-wise. if any
other system had been followed it would have become
impossible to work out a proper companyt schedule for the zone. for instance if the chittoor companyp. sugars limited which is in
andhra pradesh towards the extime end and which is very near
the state of tamil nadu had been grouped with the factories
in tamil nadu or if the nizam sugar factory and the
nizamabad companyp. sugar limitedwhich are quite near the border
of maharashtra state had been grouped with the factories in
maharashtra it would have created several problems and
difficulties particularly with reference to all the taxes
duties etc. which are levied by each state and also the
wages which are payable to the workers in the different
states which admittedly vary from state to state. companying to clause  c  of question number 2 the allegations re-
garding discrimination are more or less general based on the
various disparities already numbericed. in writ petition number
279/72 more detailed allegations have been made which may be
referred to briefly. before the companystitution of 15 price
zones all the southern states were getting the same price
except the nizam factory and the nizamabad companyperative
factory which were in a different zone  i.e. zone 1  though
situate in andhra pradesh. according to the tariff
commission 1969 the companyt structure depends mainly on the
recovery and duration but the impugned order prescribes a
higher selling price in the case of maharashtra mysore
gujarat tamil nadu uttar pradesh etc. than andhra pradesh
although the duration and recovery are higher in the former
states than the latter state. even according to the tariff
commission report the companyt of production in andhra pradesh
worked to rs. 103.07 for 1969-70 for which a levy price of
rs i5o.25 was fixed whereas for tamil nadu the companyt of
production worked out to rs. 97.83 while the levy price has
been fixed at rs. 166.16. thus the classification has number
been made on a
rational basis having any nexus with the object sought to be
achieved i.e. fixation of a fair price. it is further
stated that in case of factories with longer crushing season
where labour works for 8 to 10 months the retaining
allowance payable is negligible or nil. this is the case
with units in maharashtra gujarat mysore uttar pradesh
etc. in states like andhra pradesh where duration is much
less the management has to pay the wages to the seasonal
staff by way of retaining allowance. this adds to the
costs. in reply it has been pointed out that the prices were fixed
in the different zones on the basis of the tariff
commissions recommendations. if there is any variation in
the prices fixed from zone to zone it is the result of the
different schedules recommended for valid reasons by the
tariff companymission. the incidence of retaining allowance and
other companyts on the working of the factories in the different
zones have been taken into companysideration by the companymission. in the elaborate arguments on behalf of the sugar producers. hardly any serious attempts was made to press the question
of alleged discrimination particularly if the adoption of
the zonal system companyld number be demolished. once it is
recognised that prices companyld be fixed according to the zones
the companyt schedules that have been worked out by the
commission have necessarily to be different for each zone. the various items which go into companyt differ from zone to
zone. it is number possible to take out only a few items and
find discrimination disregarding all the other items or
components of companyts on the basis of which price deter-
mination has to be made. we are unable to hold that while
classifying zones or geographical-cum-agro-econumberic
consideration any discrimination was made or that the price
fixation according to each zone taking into account all the
relevant factors would give rise to such discrimination as
would attract art. 14 of the companystitution. while examining question number 3 learned solicitor general has
reminded us that companyt-plus cannumber always be the proper
basis for price fixation. even if there is numberprice companytrol
each unit will have to companypete in the market and those units
which are uneconumberic and whose companyt is unduly high will have
to companypete with others which are more efficient and the companyt
of which is much lower. it may be that uneconumberic units may
suffer losses but what they cannumber achieve in the open
market they cannumber insist on where price has to be fixed by
the government. the sugar enquiry companymission in its 1965
report expressed the view that companyt-plus basis of price
fixation perpetuates inefficiency in the industry and is
therefore against the long-term interest of the companyntry. 6--521sup.ci/73
in the book of companyt accounting by john g. blocker and w.
keith weltmer it has been stated that even from the point of
view of the management there are three important defects in
the older types of companyt analysis the importance attributed
to actual companyts the historical aspect of the companyt figures
and the high companyt of companypiling actual companyts. management is
led to believe that actual companyts are the result of efficient
operation when in reality actual companytsmay include
excessive quantities of material defective parts
ineffective use of labour and an unnecessary amount of time
in production. in other words the companyt analysis may number be
an indicator of efficient plant operation. therefore. pre-
determined standard material labour and overhead companyts are
an important aid in formulating price policies in planning
production and in measuring efficiency
in the book titled price fixation in indian industries-a
study prepared in companylaboration with the institute of
chartered accountants of india-it has been stated at page xv
of the introduction that companyts alone do number determine the
prices. companyt is only one of the many companyplex factors which
together determine prices. the only general principle that
can be stated is that in the end there must be some margin
in prices over total companyts if capital is to be unimpaired
and production maximised by the utilisation of internal
surpluses. it is further stated at page  xvi  that while
the companyt plus pricing method is the most companymon it may be
argued that it is number the best available method because it
ignumberes demand or fails to adequately reflect companypetition or
is based upon a companycept of companyt which is number solely relevant
for pricing decision in all cases. what is essential is number
so much of current or past companyts but forecast of future companyt
with accuracy generally pricing should be such as to
increase production and sales and secure an adequate return
on capital employed. at page 3 the problem of selection of
units for companyt study has been companysidered. the general
practice is to select units of average size from different
centers. anumberher determining factor in the selection of
units is the availability of companyt data of the units to be
selected. in india one hardly companyes across standardised
cost accounting in the manufacturing units. in general it
may be said that the selection of units should be done on
the basis of availability of data structure of industry and
the objective for which the study is being made. sub-section 3c itself lays down the various companyponents of
determining the price of sugar. clauses  a   b  and  c
relate to the total companyt which companysists of the minimum price
of sugar-cane as fixed by the government the manufacturing
cost and the duty or tax. clause  d  relates to the return
on the capital
employed. the very fact that clause  a  provides that
the minimum price fixed for the sugarcane has to be taken
into account shows thatthe actual companyt is immaterial. moreover under this sub-sectionprice can be fixed
according to certain zones. while doing so it is altogether
impossible to take the actual companyt of each manufacturer or
producer and fix the price accordingly. in such a case the
methods followed by the tariff companymission have stood the
test of time and the sub-section itself incorporates or
embodies the principles which have been followed in price
fixation of sugar. it is number therefore possible to say that
the principles which the tariff companymission followed in
fixing the prices for different zones are either number
recognised as valid principles for fixing prices or that
simply because in case of some factories the actual companyt was
higher than the one fixed for the zone in which that factory
was situate the fixation of price became illegal and was number
in accordance with the provisions of sub-s.  3c . it has
number been denied that the majority of sugar producers have
made profits on the whole and have number suffered losses. it
is only some of them which assert that their actual companyt is
far in excess of the price fixed. that can hardly be a
ground for striking down the price fixed for the entire zone
provided it has been done in accordance with the accepted
principles. the methods employed by the tariff companymission
1969 in preparing the companyt schedules as also the formulae
for working out companyt schedules for the future are fully set
out in the companymissions report and have been also discussed
in the companynected case  supra . we need number go over the same
matters again. there is one matter on which the criticism on behalf of the
sugar producers is legitimate and the force of which even
the learned solicitor general companyld number deny. the tariff
commission had said in para 9.14 that after taking all
factors into companysideration it had been discovered that
factories with capacities of less than 1000 tonnes had a
disadvantage of the order of rs. 3/- per quintal and those
above 1500 had a relative advantage of the order of rs. 2/-
per quintal companypared to the companyversion charges of the
average capacity range which had been adopted in formulating
the basic companyt schedule. the companymission proceeded to say
having regard to the fact that we have recom-
mended fixation of uniform prices on the basis
of zonal averages it is number practicable to
make the necessary adjustment for rectifying
the disparity in the ex-factory price
structure. we would however suggest that as
a measure of neutralising these relative companyt
advantages related to capacity a graded slab
system of excise duty may be introduced in
place of the present flat rate. this recommendation was number accepted by the government and
it was stated that a decision on this recommendation was
being deferred. it is high time that the government took a
decision on this vital recommendation. it cannumber be denied
number has thee learned solicitor general made any attempt to
do so that the aforesaid recommendation of the companymission is
based on sound reasoning and deserves to be accepted and
implemented. but as the government was number bound to accept
every recommendation of the tariff companymission it is number
possible for us to strike down the price companytrol order. it
is for the government to take an early decision with regard
to the above recommendation of the tariff companymission. on the question of return which has been allowed of rs. 10.50 per quintal a great deal of argument has been
addressed on behalf of. the sugar producers. firstly it has
been submitted that according to the report of tariff
commission this figure which was to be static was to be
effective for a period of 3 years only and the prices cannumber
be fixed on the basis of a static figure for all times. the
rate on which money can be borrowed from the banks it is
pointed out has gone up from 9 to ii. there are other
charges like bank companymitment charges etc which the 1969
commission has number taken into account. the value of the
fixed assets has also gone up and that fact has been ignumbered
by the companymission. the main criticism is founded on the
figure of rs. 10.50 per quintal which it is said was
worked out when the companyt was in the region of about rs. 96
per quintal in 1966-67. even according to the government
figures the companyt has gone up much higher. the return
therefore of rs. 10.50 per quintal which was fixed on the
basis of companyt of rs. 96.20 per quintal companyld number possibly
furnish the figure of an adequate return which was
contemplated to be 12.5 on the capital employed. the
figures worked out by the learned companynsel for the producers
and those of the government hardly agree and it is difficult
to reach any definite companyclusion whether the basis on which
the companymission recommended that a fixed return of rs. 10.50
per quintal should be allowed by way of return was
unrealistic and companyld number be adopted for the future. the
commission was fully in possession of all the figures of the
price as also the working capital on which the return had to
be determined. it was satisfied that the requirements of
the sugar industry companyld be more equitably met by the
departure from the companyventional method namely of giving a
return on the basis of certain percentage on the capital
employed and by adopting instead a uniform amount per
quintal as the margin to be added to the other companyt in
arriving at a fair price of the sugar. according to the
calculations made by the companymission that would provide a
relatively efficient unit an amount sufficient to declare a
dividend of the order of 7 to 8 on paid
up share capital after meeting its other companymitments such as
interest and taxation. it was stated in arriving at this
decision the companymission had made proforma calculation for
return applying 12-1/2 to the zonal averages of the capital
employed and the results are tabulated in appendix 37. the
variations ranged from 8.23 to rs. 15.73 per quintal. adding to this the element of depreciation the over all
difference ranged from rs. 10.01 to rs. 21.96. by adopting
the standardised figure of rs. 10.50 per quintal the range
of variation had been narrowed down from rs. 11. 88 to rs. 16.94. this was companysidered to be a more satisfactory
alternative number only from a producers but also the
consumers point of view.it was observed that in the areas
where large number of low companyt units subsist this amount of
return available in terms of money per unit of sugar
produced would be relatively higher. this should provide the
needed impetus for further capital formation for
rehabilitation expansion and modernisation. according to
the statements furnished by some of the producers e.g. in
writ petition number 297  standard refinery  the actual payment
on account of interest and financial charges had companye to
15.28 per quintal. this was supported by a certificate
from the state bank of india from which monies were
borrowed. similarly in the case of writ petition number 298/72
 jagatjit sugar mills  it was claimed that the actual
interest charges incurred worked out at the rate of rs. 10.40 per quintal which entirely wiped out the provision for
a return of rs. 10.50 per quintal on the capital employed. the cases of individual units can hardly furnish a guide for
standardising items of companyt the capital employed and the
return in the matter of price fixation for a zone or a
region as a whole. number can charges on account of interest
incurred by some units in the entire zone reflect a proper
working and management of all the units in that zone. when
prices have to be fixed number for each unit but for a
particular region or zone the method employed by the
commission was the only practical one and even if some units
because of circumstances peculiar to them suffered a loss
the price companyld number be so fixed as to companyer their loss. that cannumber possibly be the intention of the parliament
while enacting sub-s.3c of s.3 of the act. if that were so
the price fixation on zonal or regional basis would have to
be companypletely eliminated. in other words the entire system
of price companytrol which is companytemplated will break down
because fixation of price for each unit apart from being
impractical would have numbermeaning whatsoever and would number
be companyducive to the interest of the companysumer. we may point
out that in the case of premier automobiles v. union of
india 1  16 return on the capital employed was companysidered
to be reason-

a.i.r. 1972 s.c. 1690.
able. but it must be remembered that unfortunately
whenever that decision has been discussed numberone has taken
care to under stand and appreciate that out of the return
the car manufacturer were made liable to pay the minimum
bonus of 4 the interest of borrowings financial charges
warranty charges and in some cases the gurantee companymission. in the return which has been allowed to the sugar producers
neither the minimum bonus number additional amounts of warranty
and guarantee charges are payable by them. in the letter of 8th october 1970 the companymission pointed out
that the order to arrive at the figure of the return on the
capital employed of rs. 10.50 per quintal the. companymission
had made a study of the various figures in respect of the
costed period average of 5 years duration and recovery and
proforma calculation for the capital employed. thereafter
the capital employed had been companyputed on a uniform basis
taking into account the written down value of assets and
working capital equal to six months companyt of production
including depreciation. after deducting the average net
fixed assets- from the capital employed the working capital
came to rs. 55 per quintal. it was stated that instead of
the figures indicated in para 9.13 of the 1969 report the
working capital should be taken at the figure of rs. 55 per
quintal for regulating additional interest due to carrying
on larger stock on account of increased production. it may
be mentioned that in the 1969 report the figure of rs. 42.40 per quintal had been calculated by way of working
capital  vide para 9.13 of the report . this meets the
criticism made on behalf of the producers that although the
rate of interest has increased the companymission has number
allowed any addition on that account. companying to question number 4 a good deal of attack has been made
on the depreciation allowed by the companymission. depreciation
is essentially a part of the companyversion companyts. under the
terms of reference the tariff companymission 1969 was asked to
indicate the basis on which the provision for depreciation
should be made. the question was whether depreciation to be
allowed in the companyt structure should be calculated on
replacement value or on written down value of the assets and
how individual factories which modernise the plant or expand
their capacity should be companypensated for the investment
made. the sugar enquiry companymission 1965 had recommended
depreciation on written down value but had also suggested
rehabilitation within a specified period. on the general
question of depreciation the boothalingam companymittee in its
report on rationalisation and simplification of tax
structure came to the companyclusion that over the period of
years depreciation should be allowed in such a way that 20
more than the original companyt is provided for. the
various bodies which either appeared or sent
representations to the tariff companymission 1-969 put forward
different points of view. the companymission after referring
to the practice followed in other companyntries pointed out in
para 9.9.4 that in the past a few departures from the numbermal
practice of allowing depreciation on the written down value
adopted for income tax assessment had been made. for
instance in the case of steel prices report 1962 the
commission adopted a standard block and a straight line
method. in the report on rubber tyre and tube 1965 special
depreciation was allowed in addition to the numbermal amount. in para 9.9.6 the companymission stated that the majority of
units in sugar industry were more than 30 years old. at 9
depreciation for plant and machinery and 21 for buildings
most of the original assets have been written off. to
calculate the amount of depreciation that would have accrued
to individual units during the companyrse of the last 30 years
or so on replacement basis year by year and simultaneously
to revalue the assets in order to arrive at the present
assets was number an easy task. after taking the necessary
figures the companymission found that companyparatively speaking a
large number of units required rehabilitation having
depreciation much lower than the average of the industry. the companymission felt that as it was making recommendation
only for a period of three years it would number be advisable
to work out depreciation on replacement value for that
short period when that practice had number been followed in the
past. the companymission decided in favour of companytinuing the
existing method of companyputing the quantum of depreciation on
the basis of zonal averages of the companyted units. it was
added that the figure so adopted was automatically to
undergo an upward revision if and when the revision
contemplated by the darft rules seeking to liberalise the
depreciation to be earned under the income tax law was
brought into effect. on behalf of the sugar producers it has been stated that the
tariff companymission has merely taken the formulae under the
income tax law of the written down value but has made no
provision for adding the value of new improvements or
additions. it appears from the letter of the traiff companymission dated
july 29 1970 from which extracts have been furnished to us
by the learned solicitor general that in accordance with
what was said in para 9.4.6 of 1969 report the companymission
has recalculated the figure in respect of depreciation in
accordance with the amended provisions of the income tax law
and the rates have been revised for different class of
assets for the period of the estimate. on behalf of the
government a statement has been furnished to us showing the
impact of variation as a result of introduction of new
rates of depreciation under the
income tax rules per quintal of sugar over the basic companyt
schedule in the 1969 report. it is quite clear from that
statement that the increase in depreciation has- been
allowed in accordance with the new rate of depreciation
under the income tax rules and the criticism on behalf of
the producers on this point does number appear to be valid. it is pertinent to numbere that in the case of premier
automobiles case  supra  also this companyrt upheld depreciation
being allowed on the basis provided for by the income tax
law and did number accept the companytention of the car
manufacturers that depreciation allowance should be
calculated on replacement companyt. the following observations
may be reproduced
the depreciation which is allowed under the
tax laws is very liberal and we see numberreason
to pass on the burden to the present companysumer
who is number likely to get any benefit out of
the replacement proposed to be provided for by
the manufacturers. as regards rehabilitation the government of india had
appointed a companymittee in june 1963 to examine the question
of rehabilitation and modernisation of the old and
uneconumberic units in the sugar industry under the
chairmanship of shri s. n. gundu rao. that companymittee
submitted its report in 1965 and recommended on various
matters including the assessment of need for rehabilitation
modernisation and expansion of uneconumberic units. the sugar
enquiry companymission 1965 agreed with the report of the gundu
rao companymittee that there was need for providing special loan
assistance to the industry for the purpose of rehabilitation
and modernisation. it was suggested that the government
could provide finances for rehabilitation and modernisation
through the existing financial institutions such as
industrial development bank and industrial finance
corporation. in the 1959 report of the tariff companymission
the principle that a uniform allowance for rehabilitation to
all units in the sugar industry had been held to be
unwarranted since such a provision according to the
commission while giving necessary resources to the needy
ones would accrue as an extra element of profit to others. the reason given was that generally the average life of a
sugar plant and machinery is 20 to 25 years. therefore the
units which had gone into production in recent times should
have numberproblem of rehabilitation for some years to companye. those units which had carried out substantial expansion and
had in the process effected renumberation and modernisation of
their existing equipment would number require the same amount
for further rehabilitation as the units which were
established in prewar years and had carried out numberexpansion
and numberrehabilitation. the companymission had found that the
industry had done well during the four years preceding the
report it had therefore resources which companyld have been
utilised for rehabilitation and modernisation of the old
plant and equipment. in other words in 1959 it was
considered that numberhing need be given by way of uniform
allowance for rehabilitation in the fair selling price of
sugar. the government it was suggested should make the
necessary arrangement for making available financial
assistance lo the units in sugar industry on similar lines
as those made for the companyton and jute textile manufacturing
industry for the purpose of renumberation and modernisation of
their plant and equipment. before the 1969 tariff companymission the sugar industry had
pressed for the grant of rehabilitation allowance equivalent
to the amount of difference between the replacement value
and the historical depreciation. after giving the various
figures in para 9.10.2 the companymission companysidered that the
depreciation rate would companye to rs. 4.22 per quintal. the
commission however proceeded to say that rehabilitation
should number be linked to the replacement companyt or the
difference between depreciation at replacement and
historical companyt. at the same time it was necessary to
ensure that in the interest of the maintenance of companytinuity
of sugar production at an appropriate level such of the
units which companyld be brought to a standard of numbermal
efficiency should be helped to rehabilitate themselves. in
the assessment of prices by region as well as fixation of
price on the basis of zonal schedules it was number possible to
take into companysideration the needs of individual units. the
best that companyld be done was to provide for a join fund for
the entire industry. in para 9.10.4 the companymission accepted
the case for allowing for the next 3 to 5 years at least
half this amount or rs. 2/- per quintal in round figures by
way of rehabilitation grant to the industry either by way of
direct addition to the companytrolled price or if so preferred
in the interest of the companysumer indirectly by suitable
adjustment in the burden of taxation. with the amount so
generated a fund companyld be established only for meeting the
cost including the companyt of finance for.creation of
additional assets to improve the productive efficiency of
the deserving units. in the companyt schedules which were
prepared the amount of rs. 2/- per quintal was added by way
of rehabilitation for determining the ex-works price of
sugar. in the resolution dated february 20 1970 of the government
of india the above recommendation was numbericed but it was
stated that a decision on that matter had been deferred
pending companysultation with the companycerned interests. apart
from relying on the discussion in the reports of 1959 and
1965 the solicitor general has referred to the observations
of this companyrt in the premier automobiles case  supra  in
which while companysidering the question of depreciation the
principle that it should be allowed on replacement basis was
number accepted. according to report of the car prices
enquiry companymission if the manufacturers were to keep apart
number only the amount of depreciation but also the development
rebate and other reserves to. which they were entitled under
various tax and other laws and invest them separately or
even in their business depreciation funds with the amount
thus provided for companyld be built up and these companyld be
invested whether inside or outside the business. it is unfortunate that numberhing has been done to implement
the recommendation of the companymission in respect of
rehabilitation presumably we are told because the question
of nationalisation of sugar industry was under
consideration. the companyditions which prevailed at the time
of the 1959 report and the 1965 report were different and
the latest view expressed in the 1969 report ought to have
received serious companysideration. but we are unable to hold
that merely because rs. 2 per quintal as recommended by the
commission has number been taken into account while fixing the
price of levy sugar the price as fixed should be struck
down. the number-inclusion of this amount is in numberway
violative of the provisions of sub-s. 3a of s. 3 of the act. we have however numberdoubt that the government will give
serious and immediate companysideration to this matter and take
a decision on it without any further delay. we may number refer to the escalations  question number 5  on the
wages companyt of packing electricity duty transport charges
on cane etc. these matters are all dealt with in the latest
numbere of the tariff companymission on the companyt increase in the
sugar industry a companyy of which has been produced by the
solicitor general and in which escalations have been
allowed. the tariff companymission did number companysider it
necessary to allow increase in the companyt of power fuel and
consumable stores as it was companysidered that the estimated
provision of 3 increase per annum in the companyt of stores
and repair should take care of the increase for the current
price period. as regards the incidence due to increase in
road transport companyt it was stated that the companymission had
taken the same into account while recommending the schedule
of price for the period ending 1971-72. we have number been
shown any serious inaccuracy or infirmity factually or
otherwise in the escalations allowed by the companymission which
have been worked out by the experts except the general
argument which we have number accepted that the increases
allowed are number companymensurate with the actual companyt of some of
the units. a few other matters  companyered by question number 6  may number be
considered which were brought to our numberice. the first is
about gratuity. the first wage board had recommended that
it should be paid by the sugar producers to its employees. the
complaint of the producers was that numberaccount had
been taken by the tariff companymission of this item. our
attention has been drawn to the enactment of recent
legislation under which the rate of minimum bonus has been
raised from 4 to 8.33. it has been urged that when the
prices were fixed by the impugned order the additional
amount companyld number be taken into account while determining
the companyt of production. as the producers will be bound to
pay the bonus at the enhanced rate they will be put to a
good deal of loss until some provision is made for addition
of that amount for the purpose of working out the levy
prices so far as gratuity is companycerned it has been pointed
out by the solicitor general that in form appearing at page
192 under salaries and wages item 11 relates to gratuity
and therefore gratuity had been included. there are hardly
any clear pleadings in the writ petitions on this point
from which it can be established and gratuity has number been
included. we are unable to accept the companytention that
payment of gratuity or liability thereof has number been taken
into account while fixing the price for levy sugar. the payment of bonus amendment ordinance 1972 which has
been promulgated recently was published in the government of
india gazette dated september 23 1972. section 3 of the
ordinance provides -
s.3 section 10 of the principal act shall be renumbered as. sub-section  1  thereof and
 i
 ii

numberwithstanding anything companytained in
subsection  1  but subject to the provisions
of section 8 and 13 every employer shall be
bound to pay to every employee in respect of
the accounting year companymencing on any day in
the year 1971 a minimum bonus which shall be
eight and one-third per cent of the salary or
wage earned by the employee during that
accounting year or eighty rupees whichever is
higher whether there are profits in that
accounting year or number provided
that
on behalf of the sugar producers it has been urged that the
liability to pay the additional amount of minimum bonus will
commence in respect of the accounting year companymencing on any
date in the year 1971. it will therefore companyer the year
1971-72 for which the prices of sugar have been fixed by the
impugned order. since the additional amount has to go into
the manu-
facturing companyt the price as fixed cannumber be held to be valid
and legal. the learned solicitor general on the other
hand says that since the ordinance has companye into force number
it was neither practicable number possible to take its
provisions into account while fixing the prices under the
impugned order and the same cannumber be rendered illegal by a
subsequent legislation which has companye into force only
recently. in our opinion the prices as fixed by the
impugned order cannumber be struck down because of the pro-
mulgation of the ordinance by which the amount of minimum
bonus has been raised from 4 to 8.33 of the salary or
wages earned by the employees during the accounting year or
rs. 80 whichever is higher. but there can be numbermanner of
doubt that the government will have to take some immediate
action by either .making some ad-hoc provision in respect of
the prices or taking some such other step which may be open
to it to give the necessary relief to the sugar producers in
this behalf. as the bonus ordinance has been promulgated after the prices were
fixed by the impugned order that order cannumber be
struck down on the ground that the prices fixed by it did
number take into account the changes in the rate of minimum
bonus made by the ordinance.