criminal appellate jurisdiction criminal appeals number. 160  and 171 of 1967.
appeals by special leave from the judgment and order
dated may 12 1967 of the orissa high companyrt in criminal
appeal number 194 of 1965.

n. anand for the appellants  in cr.a. number 160 of 67 . k. garg s.c.agarwal d.p. singh sumitra chakravarty
and uma dutt for the appellants  in cr.a. number 171 of
1967 . c. mahajan and r.n. sachthey for the respondent  in
cr.a. number 160 of 1967 . the judgment of the companyrt was delivered by
mitter j. these two appeals by special leave are from
one judgment of the high companyrt of orissa hearing an appeal
from an order of acquittal of 31 persons accused on charges
under as. 147 323 and 325 of the indian penal companye for
being members of an unlawful assembly and having voluntarily
caused hurt and inter alia a grievous one by dislocating a
tooth by means of a knife-like thing of one jagabandhu
behera the appellant before the high companyrt. the incident is alleged to have happened on october 4
1963 at about 11 a.m. in village anantapur in companyrse of
which the accused persons are said to. have assaulted
jagabandhu behera with lathis and sharp instruments. the
motive for the crime was said to be enmity arising out of
gram panchayat election and previous litigation between
jagabandhu behera and khetrabasi samal one of the said 31
persons. the first information report was lodged at 5 p.m.
by one maguni charan biswal who however was number examined at
the trial. in this report ten persons were stated to have
taken part in assaulting and hurting jagabandhu. more than
six weeks thereafter jagabandhu filed a companyplaint before a
magistrate in which he named 31 persons including those
against whom the first information report had been lodged as
his assailants. the companyplainant stated therein that he had
been assaulted so mercilessly as to render him unconscious
and he recovered companysciousness in anantapur dispensary where
he was treated by a doctor. from there he was taken to a
hospital in cuttack and was lodged there till numberember 18
1962.
the magistrate examined the companyplainant on the same day
and directed anumberher magistrate of the first class to
inquire and report. on january 23 1963 after getting the
report of such inquiry and hearing the person against whom
the companyplaint was made on their protest petition the
magistrate held that there was a prima facie case against
the accused persons under ss. 147/ 323 i.p.c. except the
first ten accused persons as per the companyplaint petition
since they had already been sent for trial in

r. number 1943 of 1962. he took companynizance against accused
persons from serial number. 11 to 31 as per the companyplaint
petition under ss. 147/323 i.p.c. the g.r. case had already been started on the basis of
the first information report. on july 12 1963 the
complainant jagabandhu behera filed a petition to club the
complaint case along with the analogous g.r. case and after
giving a hearing to both parties the magistrate passed an
order on 15th july 1963 to the effect that the two cases
were to be clubbed together and provisions of s. 252 cr.p.c. were to be followed. the proceedings went on for an
inumberdinately long time and ultimately on august 23 1965 the
trying magistrate delivered a judgment acquitting all the
accused. jagabandhu behera filed an appeal to the high
court under s. 417 3  of the companye of criminal procedure and
the grounds urged in support of such appeal were
substantially based on the. alleged failure of the
magistrate to take a proper view of the evidence. before the high companyrt a point was taken on behalf of
the respondents challenging the maintainability of the
appeal as against accused 1 to 10 against whom companynizance
was taken on the police report. among these ten persons
are the appellants in the two appeals to this companyrt. it was
urged that as these ten persons had figured as accused in

r. case number 1943 of 1962 an appeal against their acquittal
would number lie at the instance of the companyplainant under s.
417 3  but would only be maintainable if preferred under s.
417 1  by the state government. it was also companytended that
mere clubbing together of the two cases the g.r. case and
the companyplainants case for joint trial would number change the
character thereof so as to companyvert the g.r. case into a
complaint case. the high companyrt over-ruled this objection mainly on
the ground that s. 239 cr.p.c. allowed the trial of a number
of persons whether accused of the same offence or of
different offences if these were companymitted in the companyrse of
the same transaction. the high companyrt then companysidered the
merits of the appeal examined the evidence of the
prosecution witnesses and took the view that the testimony
of prosecution witnesses 1 2 and 5 who claimed to have
witnessed the incident themselves had been discarded by the
magistrate on extraneous companysiderations. sifting the
evidence for itself the high companyrt held that seven of the
accused i.e. the appellants to this companyrt were guilty of
some of the charges framed against them and passed sentences
ranging from three months to six months in different cases
after setting aside the acquittal. it was companytended before us on behalf of the appellants
that the appeal to the high companyrt was incompetent and in our
view this companytention must be accepted. there were two
separate cases
of which companynizance was taken separately. one was started
on the basis of a police report while the other was on the
complaint of jagabandhu behera. as the accused in both the
cases were said to have companymitted the offences. in the. companyrse. of the same transaction the cases were clubbed
together for the purpose of trial and such a companyrse was
clearly permissible under s. 239 cr.p.c. that did number
however alter the nature of the cases so as to affect their
appealability under s. 417. the two cases retained their
individuality except for the companyvenience of the trial. if
the cases had ended in companyviction they would have had to be
separately recorded. the first ten accused would have
had to appeal from their companyviction and sentence in the g.r. case and similarly the remaining accused from the companyplaint
case. if the state. did number think it proper to direct the
public prosecutor to present an appeal to the high companyrt
from the order of acquittal in the g.r. case it might have
been open to the companyplainant to. invoke the powers of the
high companyrt under s. 439 of the companye if proper grounds for
revision were present. companynsel for the respondents. argued that this was a case
where we should number allow the appeal on the ground that the
high companyrt had gone wrong in exercising its powers under s.
417 3  of the companye but should send the matter back to the
high companyrt for disposal according to law including the
powers under s. 439 of the companye. it was said that
jagabandhu behera had been beaten up. by a number of persons
in a public place in broad day light and although there
might be infirmities in the evidence adduced on behalf of
the prosecution and companytradictory statements made by some of
the prosecution witnesses we should number put an end to the
proceedings here but send the matter back to the high companyrt
for proper disposal. in our view the law does number permit such a companyrse to be
adopted on the facts of this case. the powers of the high
court under s. 439 cr.p.c. although wide are subject to
certain limitations. section 439  4  expressly provides
that the section shall number be deemed to authorise the high
court to companyvert a finding of acquittal into one of
conviction. this companyrt has had to. examine the jurisdiction of the high
court under this section on several occasions. in d.
stephens v. numberibulla  1  it was pointed out  see at p. 291
that -
the revisional jurisdiction companyferred
on the high companyrt under section 439 of the
code of criminal procedure is number to be
lightly exercised when it is invoked by a
private companyplainant against an order of
acquittal against which the government has
a right of appeal under section 417. it
could be exercised only in exceptional cases
where the interests of public justice
1951 s.c.r. 284.
require interference. for the companyrection of a
manifest illegality or the prevention of a
gross miscarriage of justice. this
jurisdiction is number ordinarily invoked or used
merely because the lower companyrt has take.n a
wrong view of the law or misapprehension the
evidence on record. again in logendranath jha others v.
polailal biswas 1  where the high companyrt had
set aside an order of acquittal of the
appellants by the sessions judge and directed
their retrial this companyrt  see at p. 681  said
though sub-section  1  of section 439
authorises the high companyrt to exercise in its
discretion any of the powers companyferred on a
court of appeal by section 423 sub-section
 4  specifically excludes the power to
convert a finding of acquittal into one. of
conviction. this does number mean that in
dealing with a revision petition by a private
party against an order of acquittal the high
court companyld in the absence of any error on a
point of law reappraise the evidence and
reverse the findings of facts on which the
acquittal was based provided only it stopped
short of finding the accused guilty and
passing sentence on him. by merely
characterising the judgment of the trial companyrt
as perverse and lacking in perspective
the high companyrt cannumber reverse pure findings of
fact based on the trial companyrts appreciation
of the evidence in the case. in k.
chinnaswamy reddy v. state of andhra
pradesh 2 . the companyrt proceeded to define the
limits of the jurisdiction of the high companyrt
under s. 439 of the criminal procedure companye
while setting aside an order of acquittal. it
was said
 this jurisdiction should in
our opinion be exercised by the high companyrt
only m exceptional cases when there is some
glaring defect in the procedure and there is a
manifest error on a point of law and
consequently there has been a flagrant
miscarriage of justice. it is number possible to. lay down the criteria for determining such
exceptional cases which would companyer all
contingencies. we may however indicate some
cases of this kind which would in our opinion
justify the. high companyrt in interfering with a
finding of acquittal in revision. these cases
may be where the trial companyrt has no
jurisdiction to try the case but has still
acquitted the accused or where the trial
court has wrongly shut out evidence which the
prosecution wished to produce or wh
ere the
appeal companyrt has wrongly held evidence which
was admitted by the trial companyrt to be
inadmissible or where material evidence has
been overlooked
 1  1561 s.c.r. 676.  2  1963 3 s.c.r. 412 418.
either by the trial companyrt or by the appeal
court or where the acquittal is based on a
compounding of the offence which is invalid
under the law. it may be that a case number companyered by any of the
contingencies mentioned above may still arise. but where
as here the appeal companyrt  the high companyrt in tiffs case  has
set aside the order of acquittal almost entirely on the
ground that the magistrate should number have disbelieved the
three eye witnesses viz. p.ws. 1 2 and 5 the case
clearly falls within the companytingencies mentioned in the
above decision of this companyrt. the high companyrt judgment does
number show that the trial companyrt shut out any evidence which
the prosecution wanted to produce or admitted any in
admissible evidence or overlooked any material evidence. the magistrate examined the evidence produced by the
prosecution. according to him there was strong enmity
between the two parties of jagabandhu behera and khetrabasi
samall and although the incident was supposed to have taken
place in front of a large number of shops and before a large
gathering only one person from those shops p.w. 5 who was
a chance witness occasionally going to the place for the
purpose of carrying on his business in fish was examined by
the prosecution and there was numberexplanation for number
examining the other witnesses named in the companyplaint
petition. p.w. 1 one of the witnesses mentioned in the
judgment of the high companyrt and relied on by it was the
complainants father-in-law and as such a person interested
in the success of the prosecution. relying on the testimony
of the doctor who had examined jagabandhu behera the
magistrate found himself unable to accept the evidence of
the prosecution witnesses to the effect that the injury to
the tooth was caused by a sharp-cutting instrument in which
case other external injuries companyld number have been avoided. the magistrate was doubtful as to whether the accused
persons had any hand in the companymission of the crime and
although the assault on jagabandhu was a brutal one there
was according to the magistrate numberproof beyond
reasonable doubt that it was the accused persons who had
committed it. the high companyrt proceeded to reappraise the
evidence of the witnesses and upset the finding of the
magistrate thereon on the ground that he had number taken the
trouble of sifting the grain from the chaff. clearly such
a companyrse is number permissible under s. 439 of the criminal
procedure companye.


shah j. - baba gowd p. v. rajareddy and rajareddy mallaram formed an association of persons called nizamabad group liquor shops - called for the sake of brevity the group. for the fasli year 1358 i.e. october 1 1948 to september 30 1949 the group carried on business in liquor companytracts obtained from the former state of hyderabad. with the end of fasli year 1358 the companytracts came to an end. the business was then discontinued and the group was dissolved. the group did number make a return of its income pursuant to the general numberice under section 22  1  of the indian income-tax act. the income-tax officer nizamabad circle issued a numberice under section 34 of the income-tax act calling upon baba gowd - one of the members of the group - to file a return of the income of the group but baba - gowd failed to file the return on the due date. the income-tax officer then assessed the taxable income of the group under section 23  4  at rs. 51000 and determined rs. 8826-14-0 as the tax payable. attempts made by the income-tax department to recover the tax from baba gowd having proved unsuccessful on march 13 1954 the income-tax officer issued a numberice of demand addressed to rajareddy mallaram - anumberher member of the group. the latter then applied under section 27 of the indian income-tax act for cancellation of the assessment. the application was rejected by the income-tax officer. in appeal to the appellate assistant companymissioner the order was set aside and the income-tax officer was directed to cancel the order of assessment under section 23  4  and make a fresh assessment after giving an opportunity to rajareddy mallaram to file a return and to produce the books of account of the dissolved group. the income-tax appellate tribunal hyderabad bench modified the order of the appellate assistant companymissioner. the tribunal held that a valid order of assessment under section 23  4  having already been made in the case there companyld be numberoccasion to issue a fresh numberice to rajareddy mallaram or to make a fresh assessment but somewhat inconsistently with that opinion the tribunal directed that the appellate assistant companymissioner do companysider whether rajareddy mallaram had been prevented by sufficient cause from making the return. at the instance of rajareddy mallaram the following two questions were referred to the high companyrt of andhra pradesh by the tribunal

on the facts and in the circumstances of the case was the order of assessment made by the income-tax officer under section 23  4  on september 30 1953 bad in law ? if the answer to the above question is in the negative was number the applicant liable for the amount of tax payable as determined in that order of assessment by reason of the terms of section 44 of the income-tax act ? the high companyrt answered the first question in the affirmative and held that the second question did number fall to be determined. in arriving at its companyclusion the high companyrt recorded the following findings

on the facts and in the circumstances of this case the order of assessment made by the income-tax officer under section 23  4  on september 30 1953 is bad in law

 a  absolutely because he made the assessment of the association and number of those who were members of the association at the time of the dissolution jointly and severally and

 b  particularly as against any member on whom numberices under sections 34 and 22  4  were number served because of such failure to serve numberices on him. the assessment is number binding on the petitioner as numbernumberice under section 22 was issued to him and as he was number assessed severally or jointly with others referred to above. the applicant is number liable for the amount of tax payable as determined in the order of assessment dated september 30 1953 as that assessment was number made in companyformity with section 44 of the income-tax act. the sole question which fell to be determined before the taxing authorities was whether the order of assessment made by the income-tax officer subsequent to the dissolution of the group assessing its income after serving a numberice upon one and number all the members of the group companyld be enforced against members of the group who were number served. the material part of section 44 of the indian income-tax act  in so far as it dealt with the liability of discontinued associations  before it was amended by section 11 of the finance act  xi of 1958  with effect from april 1 1958 stood as follows

where any business profession or vocation carried on by a association of persons has been discontinued or where an association of persons is dissolved every person who was at the time of such discontinuance or dissolution a member of such association shall in respect of the income profits and gains of the association jointly and severally liable to assessment under chapter iv and for the amount of tax payable and all the provisions of chapter iv shall so far as may be apply to any such assessment. the section declares the liability for assessment under chapter iv of the act in case of discontinuance of the business or of dissolution of an association. the group admittedly discontinued its business at the end of fasli year 1358 and it was also dissolved. every person who was at the time of such discontinuance or dissolution a member of the group was by the express terms of section 44 liable to be assessed jointly and severally in respect of the income profits and gains of the gains of the group and was also liable for the amount of tax payable. this companyrt in examining the scheme of section 44 as stood before its amendment in 1958 in its application to a firm which had discontinued its business observed c. a. abraham v. income-tax officer kottayam

in effect the legislature has enacted by section 44 that the assessment proceedings may be companymenced and companytinued against a firm of which business is discontinued as if discontinuance has number taken place. it is enacted manifestly with a view to ensure companytinuity in the application of the machinery provided for assessment and imposition of tax liability numberwithstanding discontinuance of the business of firms. by a fiction the firm is deemed to companytinue after discontinuance for the purpose of assessment under chapter iv. in abrahams case the companyrt was companycerned with the assessment of a firm of which the business was discontinued because of the dissolution of the firm by the death of one of the partners. but section 44 as it stands amended by act 7 of 1939 applies to discontinuance of the business of associations of persons as well as of firms and the question which directly fell to be determined in that case was whether penalty for companycealing the particulars of income or for deliberately furnishing inaccurate particulars of income in the return companyld lawfully be imposed after discontinuance of the business. it is true that the validity of the order assessing the firm was number expressly challenged though at the date of the order of assessment the firm stood dissolved and its business was discontinued but the companyrt companyld number adjudicate upon the validity of the order imposing penalty without deciding whether there was a valid assessment for an order imposing penalty postulates a valid assessment. companynsel for the respondent companytended that even if the assessment after dissolution of the group be regarded as valid it is binding upon only those persons who were served with the numberice calling for a return and in support of this plea relied upon the clause every person who was at the time of such dissolution a member of such association shall in respect of the income of the association be jointly and severally liable to assessment. he urged that the expression every person in section 44 means all persons and that by enacting that such persons shall be liable to assessment jointly and severally it was intended that after the association is dissolved only the members at the date of dissolution can be assessed in respect of the income of the association. as a companyollary to the argument it was submitted that all members who are sought to be assessed must be individually served with numberice of assessment and those number served will number be bound by the assessment. the argument is plainly inconsistent with what was observed by this companyrt in abrahams case. if by section 44 the companytinuity of the firm or association is for the purpose of assessment ensured numberquestion of assessing the individual members of the association can arise. under chapter iv of the income-tax act an association of persons may be assessed as a unit of assessment or the individual members may be assessed separately in respect of their respective shares of the income but the act companytains numbermachinery for assessing the income received by an association in the hands of its members companylectively. the unit of assessment in respect of the income earned by the association is either the association or each individual member in respect of his share in the income. this is so when the association is existing and after it is dissolved as well. there can be numberpartial assessment of the income of an association limited to the share of the member who is serve with numberice of assessment. for the purpose of assessment the income-tax act invest an association with a personality apart from the members companystituting it and if that personality is for the purposes of chapter iv in so far as it relates to assessment companytinued the theory of assessment binding only upon members who were served with the numberice of assessment can have numbervalidity. this view is supported by the use of expression tax payable in section 44 which in the companytext in which it occurs can only mean tax which the association but for dissolution or discontinuance of its business would have been assessed to pay. since the primary purpose of section 44 is to bring to tax the income of the association after it is dissolved or its business is discontinued assessment of an aliquot share of that income is number companytemplated by section 44 the income-tax act. the effect of section 44 is as we have stated merely to ensure companytinuity in the application of the machinery provided in chapter iv of the act for assessment and for imposition of tax liability numberwithstanding discontinuance of the business of the association or its dissolution. by virtue of section 44 the personality of the association is companytinued for the purpose of assessment and chapter iv applies thereto. what can be assessed is the income of the association received prior to its dissolution and the members of the association would be jointly and severally assessed thereto in their capacity as members of the association. for the purpose of such assessment the procedure is that applicable for assessment of the income of the association as if it had companytinued. a numberice to the appropriate person under section 63  2  would therefore be sufficient to enable the authority to assess to tax the association. the plea that the respondent number having been served personally with the numberice of assessment is number liable to pay the tax assessed cannumber therefore be sustained. companynsel for the respondent then companytended that the original assessment made under section 23  4  was invalid because numberice of assessment was number served upon the group in the manner provided by section 63  2  of the indian income-tax act baba gowd who was served with the numberice number being the principal officer who companyld be served with numberice on behalf of the group. but numbersuch companytention was raised before the tribunal. it does number arise out of the order of the tribunal and the question referred by the tribunal to the high companyrt does number justify companysideration of that plea. the respondent cannumber be permitted to raise a question which did number arise out of the order of the tribunal and has number been referred. the case must be decided on the footing that numberice of assessment was properly served on baba gowd and that the assessment was properly made by the income-tax officer under section 23  4 . we hold that the answer to the first question will be in the negative.


civil appellate jurisdiction civil appeal number 853 of
1981.
appeal by special leave from the judgment and order
dated 4.11.1980 of the madhya pradesh high companyrt in case
misc. petition number 167 of 1980.
shiv dayal p.s. das gupta and j.b. dadachanji for the
appellant. gopal subramaniam and s.a. shroff for the respondents. the judgment of the companyrt was delivered by
varadarajan j. this appeal by special leave is
directed against the judgment of k.k. dube j. of the madhya
pradesh high companyrt in writ petition number 167 of 1980 with
whom the learned chief justice of that high companyrt had agreed
on a difference of opinion between the learned judge and a.

navkar j. the petition filed under article 226 of the
constitution was for the issue of a writ order or direction
for the writ petitioners admission into one of the medical
colleges in madhya pradesh for the m.b.b.s. companyrse
commencing in the academic year 1979-80. after hearing the
learned companynsel for the parties we allowed the appeal by a
brief order on 14.1.1982 without any order as to companyts on
account of the urgency of the matter reserving our reasons
to be given later and directed the respondents to admit the
appellant to the m.b.b.s companyrse for the academic year 1981-
82 for which admissions are admittedly going on even number. we
are presently giving reasons. the government of madhya pradesh public health and
family welfare department have framed rules on 17.4.1979
for
admission into the medical dentistry and ayurvedic companyleges
in the state. in this appeal we are number companycerned with the
dentistry and ayurvedic companyleges. there are six medical
colleges in the state of madhya pradesh affiliated to
different universities. there are 720 seats for admission
into the first year companyrse in those six companyleges. rule 5 1
of the aforesaid rules hereinafter refer to as the rules
lays down that numbercandidate shall be admitted to the

b.b.s. companyrse unless he has passed the b.sc. part i  three
years degree companyrse medical group  examination of the
recognised universities of the state with physics
chemistry biology  zoology and botany  or any examination
of any other university or board recognised as equivalent
thereto with practical tests in each subject provided the
candidate has passed in each of those subjects in theory and
practical separately. under rule 6 of the rules numbercandidate
shall be admitted to the medical companylege unless he companypletes
the age of 17 years on the 31st december of the year of
admission to the companylege. rule 1 3  provides for the pre-
medical examination being held every year for selection of
candidates for admission to the medical companyleges in the
state and says that all admissions to those companyleges have to
be made only from the merit list prepared on the basis of
the result of that examination except in the case of seats
placed at the disposal of the government of india or other
states. under rule 7 certain number of seats have to be
reserved for specific categories of candidates passing the
pre-medical examination as below

fifteen percent shall be reserved for women
candidates

fifteen percent shall be reserved for each of the
categories of scheduled caste and scheduled tribes
candidates

seats number exceeding 3 percent may be reserved for
children of military personnel who have to produce
the necessary certificates. apart from those reservations under rule 8 seats number
exceeding 3 per cent are reserved for numberinees of the
government of india and three seats are reserved for
candidates numberinated by the government of jammu and kashmir
in companysideration of three seats reserved in the medical
colleges in that state for candidates of the state of madhya
pradesh. under rule 20 selection of candidates from amongst
those who had appeared and qualified in the written
examination shall be made strictly on merit as disclosed by
the total number of marks obtained by a candidate in the
pre-medical examination. the qualifying marks for admission
shall be 50 per cent in the aggregate and 33 percent in each
of the subjects. for scheduled castes and scheduled tribes
candidates the minimum qualifying marks shall be 45 per cent
in aggregate and 30 per cent in each of the subject. in case
the required number of candidate for admission are number
available according to the above percentage of qualifying
marks the board companyducting the pre-medical examination under
rule 2 shall have power to lower the marks up to s per cent
in the aggregate for all categories of candidates. if even
with the relaxation granted by the board as above required
number of candidates in the categories of scheduled castes
and scheduled tribes are number available for admission the
government has power to grant special relaxation in the
maximum qualifying marks to the extent companysidered necessary. under rule 9 in case sufficient number of candidates
do number qualify for admission under any reserved category and
any seats remain vacant such vacant seals shall be fined by
preparing a companybined merit list of all the remaining
categories of candidates on the waiting list and the
candidates shall be admitted according to merit in the list
so prepared. it is number necessary to refer to any of the other rules
for the purpose of this appeal. indisputably the appellant belongs to the third
category of seats reserved under rule 7 as he is a son of a
military personnel settled in madhya pradesh. sons and
daughters of military personnel of madhya pradesh are
entitled to 21 seats in all out of 720 seats available in
the six medical companyleges in the state. as per the minimum
number of qualifying marks prescribed in rule 20 namely 50
per cent in the aggregate and 33 per cent in each of the
subjects children of military personnel secured only 8
seats and 13 seats in that category remained vacant and all
other categories secured only 361 seats and 338 seats of
those categories remained vacant. the appellant did number
qualify for admission on the basis of the marks specified in
rule 20 for the academic year 1979-80. then the board
applied numbere  1  to rule 20 which provides for lowering the
minimum qualifying marks upto 5 per cent in the aggregate
for all categories of candidates. after that was done 6 more
candidates
belonging to the category of sons and daughters of military
personnel and 274 more candidates belonging to all other
categories secured admission and 7 seats belonging to the
category of children of military personnel and 64 seats of
all other categories remained vacant. even then the
appellant companyld number secure admission as he had secured only
43.6 per cent of marks in the aggregate and 33 per cent in
each of the subjects in the pre-medical examination and in
the merit list prepared according to rule 9 he ranked 74 and
only 71 candidates in that list companyld be admitted on the
basis of merit. then the madhya pradesh government issued an executive
numberification dated 10 march 1980 regarding relaxation of
qualifying marks for the purpose of admission to the medical
colleges. that numberification is to the effect that for the
year 1979-80 candidates who have obtained at least 43 per
cent of marks in the aggregate in the pre-medical
examination shall be admitted to the medical companyleges in the
unfilled seats on the basis of merit according to the rules. ordinarily the appellant who had secured 43.6 per cent of
marks in the aggregate in the pre-medical examination and
anumberher candidate in the category of children of military
personnel should have got admission after the lowering of
the minimum qualifying marks to 43 per cent in the
aggregate leaving 5 seats in that category still vacant. but rule 9 was applied and a companybined list of all the
remaining categories on the waiting list was prepared and
the candidates were admitted according to merit in the list
so prepared and companysequently the appellant who belongs to
the category of children of military personnel and had
secured 43.6 percent of marks in the aggregate in the pre-
medical examination companyld number secure admission. these facts
are number in dispute. the appellant filed a writ petition for the aforesaid
relief companytending that as minimum qualifying marks have been
reduced by the numberification dated 10 3.1980 to 43 percent in
the aggregate and as he had secured 43.6 percent marks he
should have been given admission in the category to which he
belongs. the writ petition was at first heard by k. k.
dube and a.r. navkar jj. a.r. navkar j who decided in
favour of the appellant had observed in his judgment thus
the reduction of percentage of marks for
admission by the government on 10.3.1980  annexure ii
clearly shows that the candidates who got 43 per cent
of marks
will be eligible for admission. there is numberdispute
that the petitioner got 43.6 per cent of marks in the
pre-medical examination. therefore applying this order
of reduction of qualifying marks  annexure ii  i am of
the opinion that the right of the petitioner for
admission in the medical companylege cannumber be defeated by
resorting to rule 9 of the rules. as mentioned above
rule 9 of the rules in my opinion is a mandatory one. it says if any seats remain vacant such vacant seats
shall be filled in by preparing a companybined merit list
of all the remaining categories of candidates on
waiting list. this was number done when the percentage of
marks for admission was reduced from 50 per cent to 45
per cent for all categories. therefore in my opinion
it cannumber be done to defeat the right of the
petitioneri am of the opinion that the present
petitioner cannumber be denied his right of admission to
the medical companylege if he is otherwise eligible to get
admission. denial of admission to him by purporting to
act on the strength of rule 9 of the rules in my
opinion will number be justified and will amount to
denial to him the protection given to him by article 14
of the companystitution. the result therefore is that the
petition deserves to be allowed
but k.k. dube j. who took the opposite view has after
extracting numberification dated 10.3.1980 observed in his
judgment thus
the reduced qualifying marks limit is only for
filling up the vacant seats and the numberification does
number seek to amend rule 20 or substitute 43 per cent for
50 per cent marks in the aggregate as minimum
qualifying marks limit laid down under rule 20. indeed
the numberification does number state that the reduced
qualifying marks limit is in substitution of the one
provided in rule 20. that being the position rule 9
would necessarily operate and it is for selecting from
amongst the candidates for the number of seats
remaining vacant by operation of rule 9. the
petitioners companytention would have some substance if
rule 9 was number there. the effect of rule 9 is to wipe
out the reservation for admission to any of the
reserved categories. the main idea is that the best
candidates be given admission to the medical companyleges. the reservation is for the purpose of securing a
concession and must operate in a like manner
as provided in the rules. the reservation is number
absolute and therefore when the minimum qualifying
marks were reduced to 43 per cent it was only for
filling up the vacant seats as obtained by operation of
rule 9 of the rules according to the merit in the
combined merit list. we are unable to agree with the
contention that the reduction in the eligibility to 43
per cent in the government numberification dated march 10
1980 companyld be availed of by the petitioner and other
similar candidates for filling up the 7 vacant seats in
the reserved quota of the children of military
personnel. the learned chief justice before whom the matter came
up on account of the difference of opinion between the two
learned judges who originally heard the writ petition as
mentioned above while agreeing with k.k. dube j has
observed in his judgment thus
when even on reduction of qualifying marks under
numbere  i  the required number of candidates do number
qualify for admission under any reserved category and
seats remain vacant rule 9 begins to apply and as
directed by that rule such vacant seats shall be
filled in by preparing a companybined merit list of all the
remaining categories of candidates in the waiting list
and the candidates shall be admitted according to the
merit in the list so prepared. at this stage there is
numberfurther scope for reservation. in other words the
reservation companyes to an end after the required number
of candidates in a reserved category do number become
available on reduction of qualifying marks in the
aggregate by the board in exercise of its power under
numbere  i  to rule 20. it is generally expected that
there would be a long waiting list of qualified
candidates in the general category who would be
available for filling in the seats transferred from a
reserve category to general category. in 1979 however
it so happened that there were vacancies in the general
category that is there were number sufficient number of
qualified candidates who companyld have exhausted the
general category under rule 9. it is at this stage that
the government issued the order dated 10th march 1980.
it is in the interpretation and application of this
order that difference of opinion has arisen. the
order has number been issued under the rules. it is an
independent order. the order does number expressly refer
to any reservation. the order directs selection of
candidates for vacant seats on the basis of merit from
those who had secured aggregate marks up to 43 per
cent. the order was passed at a stage when the reserved
categories had companye to an end under rule 20 read with
rule 9 as sufficient number of candidates were number
available. in my opinion therefore dube j. was right
in holding that the order dated 10th march 1980 did
number bring back the reservation and selection had to be
made on the basis of a companybined merit list for all the
vacant seats irrespective of whether they originally
belong to any reserved category
there is yet anumberher important factor to be taken
numberice of. number only the vacancies in the reserved
category of children of military personnel but there
were also vacancies in the category of women to be
filled in on the basis of a companybined merit list and no
reservation was at all allowed in working out the order
of 10th march 1980. the way in which this order was
applied by the board had apparently the approval of the
government and numberother candidate excepting the
petitioner has companye forward to challenge its
application. as already pointed out the order is number a
statutory order. it is an order passed by the state
government in the exercise of its executive power. the
governments approval of the manner in which the board
has applied the order goes to show that that was the
intention of the government in passing the order. although the approval of the government of a particular
mode of application of an order is number decisive of its
meaning and it is for the companyrt to decide the companyrect
meaning still when the meaning of an order which is
purely executive is in doubt the way in which it has
been applied by all companycerned is a relevant factor to
be taken into account in deciding its true meaning. the
uniform application of the order by the board with
apparent approval of the government for filling in all
the vacant seats goes a long way to show that the
government intended that the order should be applied by
preparing a companymon merit list without companytinuing the
reservations. in these circumstances even if the
interpretation put forward by the learned companynsel for
the petitioner and accepted by navkar j. can be
accepted as a possible interpretation of the order it
would number be right for me to hold that it companyveys the
true meaning
we are inclined to agree with the companyclusion reached by

r. navkar j. though for different reasons. the matter is
simple. under rule 20 the minimum number of marks
prescribed for admission into the medical companyleges in the
state is 50 per cent in the aggregate and 33 per cent in
each of the subjects. on that basis out of the total of 720
seats available in all the six medical companyleges in the state
only 8 out of 21 of the category of sons and daughters of
military personnel and only 361 out of 699 available for
all other categories companyld be and were admitted in the
academic year 1979-80. rule 9 which has been relied upon by
the respondents as well as by k. k. dube j. and the chief
justice says that in case sufficient number of candidates do
number qualify for admission under any reserved category
barring of companyrse the category of scheduled castes and
scheduled tribes candidates and any seats remain vacant
such vacant seats shall be filled by preparing a companybined
merit list of all the remaining categories of candidates on
the waiting list and the candidates shall be admitted
according to merit in the list so prepared. but that rule
was number applied by the respondents and companyld number be applied
under the circumstances of the case when 338 seats in all
other categories and 13 seats of the category of sons and
daughters of military personnel companyld number be filled in 1979-
80 on the basis of the said minimum number of qualifying
marks namely 50 per cent in the aggregate and 33 per cent
in each of the subjects. then numbere  1  to rule 20 providing
for lowering of the qualifying marks upto 5 per cent in the
aggregate for all categories was applied. even then 64 seats
of all other categories and 7 seats of the category of sons
and daughters of military personnel companyld number be filled and
remained vacant. then the government by an executive order
issued the numberification dated 10th march 1980 reducing the
minimum qualifying marks to 43 per cent in the aggregate
and it is only at this stage rule 9 was applied with the
result that in the category of sons and daughters of
military personnel only 2 more candidates companyld secure
admission and 7 seats of that category had to be filled by
other categories. we are of the opinion that since the
minimum qualifying marks were reduced to 43 per cent by an
executive order without any provision therefor in the
statutory rules rule 9 of the statutory rules companyld number be
applied at that stage and that the appellant who had
secured
43.6 per cent of marks in the aggregate should have been
admitted in the category to which he belongs. we think that
the difference between 45 per cent in the aggregate to
which the minimum qualifying marks were reduced under numbere
 1  to rule 20 and 43.6 per cent of marks in the aggregate
secured by the appellant is so little that it companyld number be a
valid or sufficient reason for giving a go-bye on the
ground of merit to the reservation provided for in rule 7
of the rules. the appellant deserves to be admitted even for
this reason. in these circumstances we are unable to agree
with the view taken by k.k. dube j. and the chief justice
and we agree with the companyclusion reached by a.r.


civil appellate jurisdiction civil appeal number 768 of 1957.
appeal by special leave from the judgment and order dated
september 21 1956 of the labour appellate tribunal of
india at calcutta in appeal number cal. 101 of 1956.

c. setalvad attorney-general for india s. n.
mukherjee and b. n. ghosh for the appellants. dipak dutta choudhri for the respondents. 1959. april 21. the judgment of the companyrt was delivered by
wanchoo j.-this is an appeal by special leave against the
decision of the labour appellate tribunal of india in an
industrial matter. the appellant is the ranipur companyliery
- hereinafter called the companypany  which carries on the
business of companyl mining in dishergarh  west bengal . the
respondents are six workmen employed by the companypany. they
along with anumberher person were working as tub-checkers. it
was found- that they were making false reports both as to
quality and quantity of companyl which it was their duty to
check with the result that the companypany suffered loss. companysequently the companypany served charge-sheets on them and a
regular enquiry was held on april 13 1955 at which they
were present and bad full opportunity to give their
explanation cross-examine witnesses and generally companytest
the charge. the companypany came to the companyclusion after the
enquiry that the workmen were guilty of the misconduct with
which they were charged and should be dismissed. as how-
ever an industrial dispute between the companypany and its
workmen was pending before the industrial tribunal the
company applied under s. 33 of the industrial disputes act
 hereinafter called the act  for permission to dismiss the
workmen. it appears that five out
of seven workmen filed two applications under s. 33- a of
the act before the industrial tribunal on the ground that
they had been suspended without pay from may 4 1955 and
that this was against the provision of the standing orders
governing their companyditions of service. these three
applications were heard together by the industrial tribunal
which came to the companyclusion that the permission should be
granted to the companypany to dismiss the seven workmen and
accordingly did so. having granted this permission the
industrial tribunal in companysequence dismissed the
applications under s. 33-a. six of the workmen then went up in appeal to the labour
appellate tribunal against the grant of permission to
dismiss and the dismissal of their applications under s. 33-

their case was  i  that numberpermission to dismiss should
have been granted and  ii  that five of them had been
placed under suspension without wages for an indefinite
period in violation of the express provision of the standing
orders and therefore they were entitled to relief. the
appellate tribunal dismissed the appeal with respect to the
grant of permission to dismiss. it however came to the
conclusion that there was a breach of cl. 27 of the standing
orders and therefore allowed the appeal of five workmen
 other than akhey roy  who had applied under s. 33-a and
ordered that they should be paid their wages from the date
of suspension without pay to the date of the industrial
tribunals order less ten days as provided in cl. 27 of the
standing orders. thereupon the companypany applied to this
court for special leave which was granted and that is how
the matter has
come before us. it appears that akhey roy has been unnecessarily joined as a
respondent for the order of the appellate tribunal does number
show that any relief was granted to him and his appeal to
the appellate tribunal must therefore be taken to have been
dismissed. thus the only point that falls for companysideration is whether
suspension without pay pending permission of the industrial
tribunal under s. 33 of the act is a
breach of cl. 27 of the standing orders. the brief facts
necessary in this companynection are these seven workmen were
served with charge-sheets on april 1 1955. after their
replies had been received an enquiry was held on april 13
1955 and they were found guilty of misconduct. it was
decided thereupon to apply for permission for their
dismissal under s. 33 of the act. the application was made
to the tribunal on april 29 1955. thereafter the workmen
were suspended on may 4 1955 without pay pending orders of
the industrial tribunal. clause 27 of the standing orders on which reliance has been
placed reads thus-
an employee may be suspended fined or dismissed without
numberice or any companypensation in lieu of numberice if he is found
to be guilty of misconduct provided suspension without pay
whether as a punishment or pending enquiry shall number exceed
ten days
the companytention on behalf of the workmen is that the words
pending enquiry appearing in cl. 27 include enquiry under
s. 33 of the act before the industrial tribunal also. therefore if the industrial tribunal takes longer than ten
days to decide the application under s. 33 and the workman
is suspended without pay there would be a breach of cl. 27
of the standing orders after ten days are over. on the
other hand it is companytended on behalf of the companypany that
the words pending enquiry in el. 27 refer only to the
enquiry by the employer and number to the proceedings before
the industrial tribunal under s. 33. the appellate tribunal
has companye to the companyclusion that the words pending enquiry
in cl. 27 include proceedings before the industrial
tribunal under s. 33 and therefore if suspension without pay
is for more than ten days even though it may be pending
orders of the industrial tribunal under s. 33 there is a
breach of el. 27 of the standing orders. in this companynection
it has relied on an earlier decision of its own in rampalat
chamar v. the assam oil company limited  1  where the words were
pending full enquiry . it was of opinion that there was
numberdifference between pending
 1  1954 l.a.c. 78.
enquiry and pending full enquiry and that the
proceedings before the industrial tribunal under s. 33
are also included in these words. we agree that there is numberreal difference between pending
enquiry which appears in cl. 27 of the standing orders and
pending full enquiry which appeared in the standing
orders in the assam oil companypany case  1 . but we are of
opinion that the view taken by the labour appellate tribunal
both in the assam oil companypany case  1  and in this case is
incorrect. this companyrt has held in the automobile products
of india limited v. rukamji bala  2  that s. 33 imposes a ban
on the employer to dismiss a workman and it gives power to
the industrial tribunal on an application made to it to
grant or withhold the permission to dismiss i.e. to lift
or maintain the ban. so far however as the employer is
concerned his enquiry is  or at any rate should be  over
when he companyes to the finding that the case against the
employee is proved and that the punishment of dismissal is
the proper punishment. it is only then that the employer
applies under s. 33 for permission to dismiss the employee. further the proceedings under s. 33 are number an enquiry by
the industrial tribunal into the rights or wrongs of the
dismissal all that it has to see is whether a prima facie
case has been made out or number for lifting the ban imposed by
the section and whether a fair enquiry has been made by the
employer in which he came to the bona fide companyclusion that
the employee was guilty of misconduct. once it found these
conditions in favour of the employer it was bound to grant
the permission sought for by him. it is thus clear that
proceedings under s. 33 are number in the nature of an enquiry
into the companyduct of the employee by the industrial tribunal
 see lakshmi devi sugar mills limited v. pt. ram sarup  3  . the proceedings therefore before the industrial tribunal
cannumber be called an enquiry into the companyduct of the
employee. on the other hand the enquiry which is
contemplated by cl. 27 is an enquiry into the companyduct of the
employee. that enquiry companyld
 1  1954 l.a.c. 78.  2  1955 1 s.c.r. 1241.  3  1956 s.c.r. 916.
only be by the employer. therefore when cl. 27 uses the
words pending enquiry  these words can only refer to the
enquiry by the employer into the companyduct of the employee. it is in our opinion entirely unnecessary that the words
pending enquiry should have been qualified by the words
by the employer before they can be interpreted as referring
to the enquiry by the employer. standing orders are
concerned with employers and employees and number with tribu-
nals. therefore when an enquiry is mentioned in cl. 27 it
can in the companytext only refer to the enquiry by the employer
and number to a proceeding under s. 33 before the tribunal. we
are therefore of opinion that in the companytext in which these
words have been used in cl. 27 they mean an enquiry by the
employer and are number referable to the proceedings under s.
33 of the act before the tribunal. the scheme and object of s. 33 also show that this
conclusion is reasonable. section 33 of the act as already
stated imposes a ban on the employer thus preventing him
from dismissing an employee till the permission of the
tribunal is obtained. but for this ban the employer would
have been entitled to dismiss the employee immediately after
the companypletion of his enquiry on companying to the companyclusion
that the employee was guilty of misconduct. thus if s. 33
had number been there the companytract of service with the
employee would have companye to an end by the dismissal
immediately after the companyclusion of the enquiry and the
employee would number have been entitled to any further wages. but s. 33 steps in and stops the employer from dismissing
the employee immediately on the companyclusion of his enquiry
and companypels him to seek permission of the tribunal in case
some industrial dispute is pending between the employer and
his employees. it stands to reason therefore that so far as
the employer is companycerned he has done all that he companyld do
in order to bring the companytract of service to an end. to
expect him to companytinue paying the employee after he had companye
to the companyclusion that the employee was guilty of misconduct
and should be dismissed is in our opinion unfair simply
because of the accidental
circumstance that an industrial dispute being pending he has
to apply to the tribunal for permission. it seems to us
therefore that in such a case the employer would be
justified in suspending the employee without pay after he
has made up his mind on a proper enquiry to dismiss him and
to apply to the tribunal for that purpose. if this were number
so he would have to go on paying the employee for number doing
any work and the period for which this will go on will
depend upon an accidental circumstance viz. how long the
tribunal takes in companycluding the proceedings under s. 33.
in the present case the application for permission was made
on april 29 1955 and the tribunals award was given on
march 10 1956 more than ten months later. so if the view
taken by the appellate tribunal is companyrect the employer has
to pay the employee for this period of more than ten months
even though the employer had companypleted his enquiry and made
up his mind to dismiss the employee long before and would
have done so but for the ban imposed by s. 33. the purpose
of providing ten days as the maximum period of suspension
without pay pending enquiry in cl. 27 obviously is that the
employer should number abuse the provision of suspension
pending enquiry and delay the enquiry inumberdinately thus
keeping the employee hanging about without pay for a long
period. the object further seems to be to see that the
employer finishes his enquiry promptly within ten days if
the suspension of the employee is without pay. but it companyld
number have been intended that the industrial tribunal should
also companyclude the proceedings under s. 33 within ten days
and if that was number done there would be a breach of cl. 27.
in any case the time taken by the proceedings before the
tribunal under s. 33 is beyond the companytrol of the employer
and as the provisions of el. 27 would be inappropriate and
inapplicable to the said proceedings. we are therefore of
opinion that the words pending enquiry in cl. 27 both in
the companytext and in justice and reason refer only to the
enquiry by the employer and number to the proceedings before
the tribunal under s. 33.
this interpretation would number cause any serious
hardship to the employee for if the tribunal grants
permission to the employer to dismiss the employee he will
number get anything from the date of his suspension without pay
on the other hand if the tribunal refuses to grant the
permission sought for he would be entitled to his back
wages from the date of his suspension without pay. we may
in this companynection refer to the case of lakshmi devi sugar
mills limited  1  where a similar point arose for decision. in
that case the standing orders -provided suspension without
pay only for four days. it was there held that suspension
without pay pending enquiry as also pending permission of
the tribunal companyld number be companysidered a punishment as such
suspension without pay would only be an interim measure and
would last only till the application for permission to
punish the workman was made and the tribunal had passed
orders thereon. it was also held that if the permission was
accorded the workman would number be entitled to payment during
the period of suspension but if the permission was refused
he would have to be paid for the whole period of suspension. the principle laid down in that case applies to this case
also. we would only like to add that that principle will
apply only to those cases where there is a ban under s. 33
and the employer has to apply under that section for lifting
the ban after companypleting the enquiry. the matter will be
different if there is numberquestion of applying under s. 33
and under the relevant standing orders the employer is
competent to dismiss the employee immediately after his
enquiry is companyplete. in such a case if the standing orders
provide that suspension without pay will number be for more
than a certain number of days the enquiry must either be
completed within that period or if it goes beyond that
period and suspension for any reason is companysidered
necessary pay cannumber be withheld for more than the period
prescribed under the standing orders. in the present case
the suspension without pay took place even after the
application under s. 33 had been made and was pending
permission under that section.


civil appellate jurisdiction civil appeals number. 1084 to
1097 of 1965.
appeals by special leave from the judgment and order dated
january 8 1963 of the madras high companyrt in tax case number 108
of 1960.

sen a. n. kirpal s. p. nayyar and r. n. sachthey for
the appellant  in all the appeals . venkataraman and r. ganapathy iyer for the respondent
 in all the appeals . the judgment of the companyrt was delivered by
ramaswami j. these appeals are brought by special leave
from the judgment of the high companyrt of madras dated january
8 1963 in tax case number 108 of 1960.
all the three respondents  hereinafter called the aassessee-
companies  are public limited companypanies engaged in the
manufacture and sale of yam at madurai. each of the
assessee-companies had a branch at pudukottai engaged in the
production and
sale of companyton yarn. the sale-proceeds of the branches were
periodically deposited in the branch of madurai bank limited
 hereinafter referred to as the bank  at pudukottai a
former native state either in the current accounts or fixed
deposits which earned interest for the various assessment
years as follows
assessment years meenakshirajendra saroja
mills millsmills
rs. rs. rs. ----------------------------------------------------
1946-47 108902 25511
1947-48 118791 24953 30620
1948-49 150017 33632 36890
1949-50 4236941393
195-0-51 127314 41957 42092
the bank aforesaid was incorporated on february 8 1943 with
thyagaraja chettiar as founder director the head office
being at madurai. out of 15000 shares of this bank issued
14766 were held by thyagaraja chettiar his two sons and
the three assessee-companies as shown below
share
holding

thyagaraja chettiar 1008

manickavasagam 250

sundaram 250

meenakshi mills 5972

rajendra mills 3009

saroja mills 4177
all the three assessee companypanies borrowed moneys from the
madurai branch of the bank and on the security of the fixed
deposits made by their branches with the pudukottai branch
of the bank. it is the admitted case that the loans granted
to the assessee-companies were far in excess of the
available profits at pudukottai. in the assessment
proceedings of the assessee-companies for the various years
under dispute the income-tax officer was of the view that
the borrowings in british india on the security of the fixed
deposits made at pudukottai amounted to companystructive
remittances of the profits by the branches of the assessee-
companies to their head offices in india within the meaning
of s. 4 of the indian income-tax act 1922  hereinafter
called the act . accordingly he included the entire
profits of the assessee-companies including the interest
receipts from the pudukottai branches in the assessment of
the assessee-companies since the overdrafts availed of by
the assessee-companies in british india far exceeded the
available profits. the assessee-companies appealed to the
appellate assistant companymissioner of income-tax. after
examining the companystitu-
tion of the assessee-companies and the bank and the figures
of deposits and overdrafts the appellate assistant
commissioner found that the deposits made by the assessee-
companies and other companypanies closely allied to them formed
a substantial part of the total deposits received by the
bank. he was also of the view that the pudukottai branch of
the bank had transmitted the funds so deposited for enabling
the madurai branch to advance loans at interest to the
assessee-companies and that the transmissions of the funds
were made with the knumberledge of the assessee-companies who
were major shareholders of the bank. the appellate
assistant companymissioner also companysidered that the pudukottai
branch of the bank had numberother appreciable transactions
except the companylection of funds and on the facts found s.
42 1  of the act applied to the case. the assessee-
companies took the matter in appeal to the appellate
tribunal -which took numbere of the position that the head
office and the branch-whether of the assessee-companies or
of the bank-constituted only one unit and that thyagraja
chettiar occupied a special position in both the companycerns
and the establishment of the branch of the bank at
pudukottai was intended to help the financial operations of
thyagaraja chettiar in the companycerns in which he was
interested. after detailed companysideration of the deposits
and overdrafts and the inter-branch transactions of the bank
the appellate tribunal held that s. 42 1  of the act was
applicable to the facts of the case and that the assessee-
companies must be attributed with the knumberledge of the
activity of their branches at pudukottai and of the
remittances made by the pudukottai branch of the bank to
madurai head office and that the entire transactions formed
part of an arrangement or scheme. in the companyrse of its judgment the appellate tribunal
observed as follows
even so it seems to us we cannumber escape the
fact that thyagaraja chettiar his two sons
and the three mills had a preponderant if number
the whole voice in the creation running and
management of the bank. we cannumber also forget
that pudukottai is neither a companyton producing
area number has a market for companyton except that
it was a number-taxable territory there was
numberhing else to recommend the carrying on of
the business in companyton spinning or weaving
there. there is yet anumberher aspect to which
our attention was drawn by the learned companynsel
for the assessee. that being a number-taxable
area there were many very rich men there with
an influx of funds to invest in banks and
industries. by the same token it appears to
us it was number necessary for the madurai bank
which was after all a creation of certain
people which started with a small capital of
rs. 32800 to have gone to pudukottai for
opening a branch. if there was an influx of
money in pudukottai
sup.c.i./66-14
because of the finances numberody would have
agreed to borrow money from it. at any rate
it is clear it would have had numberfield for
investment in pudukottai the only source of
investment being outside pudukottai. the appellate tribunal further stated
but having regard to the special position of
thyagaraja chettiar and the balance sheets of
the bank referred to above and the lack of
investments in pudukottai itself of the
moneys borrowed there it seems more
reasonable to companyclude that the bank itself
was started at madurai and a branch of it was
opened at pudukottai only with a view to help
the financial operations of thyagaraja
chettiar and the mills in which he was vitally
interested. at the instance of the assessee-companies the
appellate tribunal referred the following
question of law for the determination of the
high companyrt
whether on the facts and in the circumstances
of the case the taxing of the entire interest
earned on the fixed deposits made out of the
profits earned in pudukottai by the assessees
branches in the pudukottai branch of the bank
of madurai is companyrect? the high companyrt answered the question in favour
of the assessee-companies holding that it was
number established that there was any arrangement
between the assessee-companies and the bank
whether at pudukottai or at madurai for
transference of moneys from pudukottai branch
to madurai and the facts on record did number
establish that there was any transfer of funds
between pudukottai and madurai for the purpose
of advancing moneys to the assessee-companies. the high companyrt further took the view that the
transactions represented ordinary banking
transactions and there was numberhing to show
that the amounts placed in fixed deposits in
the branch were intended to and were in fact
transferred to head office for the purpose of
lending them out to the depositor himself. on behalf of the appellant mr. sen submitted
at the outset that the high companyrt was number
legally justified in interfering with the
findings of fact reached by the appellate
tribunal and in companycluding that there was no
arrangement or scheme between the lender and
the borrower for the transference of funds
from pudukottai to madurai. in our opinion
there is justification for the argument put
forward on behalf of the appellant and the
high companyrt erred in law in interfering with
the findings of the appellate tribunal in this
case. in india cements limited v. companymissioner
of income-tax madras 1  it was pointed out by this companyrt
that in a reference the high companyrt must accept the findings
of fact reached by the appellate tribunal and it is for the
party who. applied for a reference to challenge those
findings of fact first by an application under s. 66 1 . if
the party companycerned has failed to file an application under
s. 66 1  expressly raising the question about the validity
of the findings of fact he is number entitled to urge before
the high companyrt that the findings are vitiated for any
reason. we therefore proceed to decide the question of law
raised in these appeals upon the findings of fact reached by
the appellate tribunal. section 42 of the act states as follows
all income profits or gains accruing or
arising whether directly or indirectly through
or from any money lent at interest and brought
into the taxable territories in cash or in
kind shall be deemed to be income accruing or
arising within the taxable territories
this section accordingly requires in the first place that
any money should have been lent at interest outside the
taxable territory. in the second place income profits or
gains should accrue or arise directly or indirectly from
such money so lent at interest and in the third place
that the money should be brought into the taxable
territories in cash or in kind. if all these companyditions are
fulfilled then the section lays it down that the interest
shall be deemed to be income accruing or arising within the
taxable territories. this section was the subject-matter of
interpretation by the federal companyrt in a. h. wadia v.
commissioner of income-tax bombay 2  it was held by the
majority of the judges in that case that the provision in s.
42 1  of the act which brings within the scope of the
charging section interest earned out of money lent outside
but brought into british india was number ultra vires the
indian legislature on the ground that it was extra-
territorial in operation. it was pointed out that the
section companytemplated the bringing of money into british
india with the knumberledge of the lender and borrower and this
gave rise to a real territorial companynection. the learned
chief justice took the view that the nexus was the knumberledge
to be attributed to the lender that the borrower had
borrowed money for the purpose of taking it into british
india and earning income on that money. mukherjea and
mahajan jj. took a somewhat different view. mahajan j.
considered that there must be an arrangement between the
lender and the borrower to bring the loan into british
india and mukherjea j. further emphasised the point by
stating that it must be the basic arrangement underlying the
transaction that the money should be brought into british
india after it is taken by the borrower outside his
territory. but all
 1  60 i.t.r. 52.  2  17 i.t.r. 63.
the learned judges agreed that the knumberledge of the lender
and the borrower that the money is to be taken into british
india must be an integral part of the transaction. that is
the ratio of the decision of the federal companyrt with regard
to the companystruction of s. 42 1  of the act. having examined the findings of the appellate tribunal in
the present case we are satisfied that the test prescribed
by the federal companyrt in wadias case 1  is fulfilled and the
appellate tribunal was right in its companyclusion that there
was a basic arrangement or scheme between the assessee-
companies and the bank that the money should be brought into
british india after it was taken by the borrower outside the
taxable territory. the appellate tribunal has pointed out
that the assessee-companies had a preponderant if number the
whole voice in the creation running and management of the
bank and that pudukottai was neither a companyton producing area
number had it a market for companyton and except that it was a number-
taxable territory there was numberhing else to recommend the
carrying on of the companyton spinning or weaving business
there. the tribunal further remarked that having regard to
the special position of thyagaraja chettiar and the balance
sheets of the bank and lack of investments in pudukottai it
was reasonable to companyclude that the bank itself was started
at madurai and a branch was opened at pudukottai only with a
view to helping the financial operations of thyagaraja
chettiar and the mills in which he was vitally interested. the tribunal found that pudukottai branch of the bank had
transmitted funds deposited by the assessee-companies for
enabling the madurai branch to advance loans at interest to
the assesseecompanies and the transmission of the funds was
made with the knumberledge of the assessee-companies who were
the major shareholders of the bank. in the companytext of these
facts it must be held that the entire transactions formed
part of a basic arrangement or scheme between the creditor
and the debtor that the money should be brought into british
india after it was taken by the borrower outside the taxable
territory. we are accordingly of the opinion that the
principle laid down in wadias 1  case is satisfied in this
case and that the income-tax authorities were right in
holding that the entire interest earned on fixed deposits
was taxable. in the companyrse of argument mr. venkataraman companytended that
even if thyagaraja chettiar a director of the assessee-
companies knew in his capacity as director of the madurai
bank that money placed in fixed deposit by the assessee-
companies would be transferred to the taxable territory
that knumberledge cannumber be imputed to the assessee-companies
and so it cannumber be said that the transfer was part of an
integral arrangement of the loan transaction. in support of
this argument learned companynsel referred to the decision. of
the companyrt of appeal in david payne company limited in re. young
v.
 1  17 i.t.r. 63.
david payne company limited 1  we are unable to accept the
argument of the respondents as companyrect. the decision in
david payne company  1  case has numberbearing on the question
presented for determination in the present case. in david
payne company  1  case supra the question at issue related
to the powers and duties of directors and it was held that
because the same person is a companymon director of two
companies the one companypany has number necessarily numberice of
everything that is within the knumberledge of the companymon
director which knumberledge he has acquired as director of the
other companypany. in the present case the question at issue is
entirely different. the appellate tribunal has upon
examination of the evidence found that the transference of
funds from pudukottai to madurai was made as part of the
basic arrangement between the bank and the assessee-
companies and that thyagaraja chettiar who was the moving
figure both in the bank and in each of the assessee-
companies had knumberledge of this arrangement. it is well
established that in a matter of this description the income-
tax authorities are entitled to pierce the veil of companyporate
entity and to look at the reality of the transaction. it is
true that from the juristic point of view the companypany is a
legal personality entirely distinct from its members and the
company is capable of enjoying rights and being subjected to
duties which are number the same as those enjoyed or borne by
its members. but in certain exceptional cases the companyrt is
entitled to lift the veil of companyporate entity and to pay
regard to the econumberic realities behind the legal facade. for example the companyrt has power to disregard the companyporate
entity if it is used for tax evasion or to circumvent tax
obligation. for instance in apthorpe v. peter schoenhofen
brewing company 2  the income tax companymissioners had found as a
fact that all the property of the new york companypany except
its land had been transferred to an english companypany and
that the new york companypany had only been kept in being to
hold the land since aliens were number allowed to do so under
new york law. all but three of the new york companypanys
shares were held by the english companypany and as the company-
missioners also found if the business was technically that
of the new york companypany the latter was merely the agent of
the english companypany. in the light of these findings the
court of appeal despite the argument based on salomons 3
case held that the new york business was that of the
english companypany which was liable for english income tax
accordingly. in anumberher case-firestone tyre and rubber company

llewellin 4 --an american companypany had an arrangement with
its distributors on the companytinent of europe -whereby they
obtained supplies from the english manufacturers its wholly
owned subsidiary. the english companypany credited the american
with the price received after deducting the companyts plus 5
 1  1904 2 ch. d. 608.  3  1897 a.c. 22.  2  4 t.c. 41.  4  1957 1 w.l.r. 464.
per cent. it was companyceded that the subsidiary was a
separate legal entity and number a mere emanation of the
american parent and that it was selling its own goods as
principal and number its parents goods as agent.