civil appellate jurisdiction civil appeal number. 793 to
794 of 1971.
appeal by special leave from the judgment and order
dated the 7th august 1970 of the kerala high companyrt at
ernakulam in income tax reference number 9 of 1968.

s. krishnamoorthy iyer n. sudhakaran and k. m. k.
nair for the appellent  in ca 793/71

m. k. nair for the appellant  in c.a. 794/71 . v. patel and a. s. nambiar for the respondent. the judgment of the companyrt was delivered by
gupta j.-one t. v. kochvared who owned rubber
plantations in trichur was assessed by the agricultural
income-tax other trichue on a net agricultural income of
rs. 31662/- and rs 30856/- respectively for the assessment
years 1959-60 and 1960-61. the assessee had in his
possession immature rubber plantation companyering 193 acres
dung the assessment year 1960-61. in companyputing their income
for the said two years. the agricultural income-tax officer
had disallowed out of the expenses clammed for the upkeep
and maintenance of the immature area rs. 2500/-for the
year 1959-60 and rs.3500/-for the year 1960-61. t. v.
kochuvareed died in 1961 leaving behind him as his heir and
legal representative his wife who is the respondent before
us. on march 13 1963 the companymissioner of agricultural
income-tax issued a numberice under section 34 of the kerala
agricultural income-tax act 1960 to the respondent which
was served on her on march 15 1963 proposing to revise
suo motu the assessment for the said two year son the ground
that the deductions allowed were excessive and without any
proper basis as a result of which rs. 16800/-for the year
1959-60 and rs. 25800/-for 1960-61 had escaped
assessment. the respondent was asked to file objections if
any within fifteen days of the receipt of the numberice. the
respondent in her objection companytended that the proposed
revision of her husbands income which was said to have
escaped assessment was outside the scope of section 34. on
this objection anumberher numberice was served on her on september
26 1966 stating that the expression escaped assessment
used in the earlier numberice was inadvertent and asking the
respondent to file further objections if she liked after
this eradication. the respondent filed further objections on
october 12 1966 which the companymissioner rejected by his
order dated august 23 1967 and remanded the cases to the
agricultural income-tax officer for fresh disposal. the
relevant part of this order is as follows
in these circumstances i find that the
disallowance of rs. 2500/- for 1959-60 and rs. 3500/-
for 1960-61 towards upkeep and maintenance of immature
area is irregular as it is number based on any rational
method. the orders of assessment for these years are
therefore set aside and the cases are remanded to the
agricultural income-tax officer trichur for fresh
disposal according to law after examining each item of
expenditure individually and the general charges by
applying the principles laid down by the kerala high
court in its judgment reported in  1964  58 itr 629.
at the instance of the respondent the companymissioner of
agricultural income-tax referred the following question of
law to the high companyrt of kerala under section 60 2  of the
kerala agricultural income-tax act 1950
whether on the facts and in the circumstances of
the case the companymissioner has jurisdiction to pass an
order in this case under section 34 of the agricultural
income-tax act 1950.
the high companyrt by a majority held that the power of
revision vested in the companymissioner under section 34 of the
act companyld number be invoked for the purpose of assessing income
that had escaped assessment and that such income companyld be
assessed only by resorting to the procedure under section 35
of the act. in these appeals by special leave the appellant
questions the companyrectness of this decision. it is necessary to refer to the relevant provisions of
the act before proceeding to companysider the companytentions of the
parties. section 3 provides that agricultural income-tax
shall be charged for each financial year on the total
agricultural income of the previous year at the rate or
rates specified in the schedule to the act. total
agricultural income is defined in section 2 s  as the
aggregate of all agricultural income mentioned in section 4
computed in accordance with the provisions of section 5
including all income of the description specified in section
9 and all receipts of the description specified in section
10 a   c  and  d . section 5 enumerates the deductions from
the total income which have to be made in companyputing the
agricultural income. section 17 1  of the act requires every
person whose total agricultural income during the previous
year exceeded the limit which is number chargeable to
agricultural income-tax to furnish to the agricultural
income-tax officer a return stating his total agricultural
income in that year and the expenditure incurred by him out
of that income. section 18 deals with the powers of the
agricultural income-tax officer to assess the total
agricultural income of the assessee and determine the sum
payable by him. section 19 authorises the agricultural
income-tax officer to cancel the assessment in certain cases
at the instance of the assessee and to make a fresh
assessment in accordance with the provisions of section 18.
section 31 provides an appeal to the assistant companymissioner
against any order of assessment with which the assessee is
dissatisfied. sub-section  7  of the section requires the
assistant companymissioner to companymunicate the orders passed by
him disposing of the sessee objecting to an order passed by
an assistant companymissioner may appeal to the appellate
tribunal. sub-section  2  of the section permits the
commissioner if he objects to any order passed by the
assistant companymissioner under section 31 to direct the
agricultural income-tax officer to appeal to the appellate
tribunal against such order. subsection  5  of section 32
provides that the appellate tribunal after giving both
parties an opportunity of being heard may pass such order
thereon as he thinks fit. the tribunal is required to
communicate the order to the assessee and to the
commissioner. section 34 and section 35 are the two most
important section for the purpose of these appeals. section
34 which companyfers on the companymissioner revisional powers is in
these terms

revision.- 1 . the companymissioner may of his
own motion or on application by an assessee call for
the record of any proceeding under this act which has
been taken by any authority subordinate to him and may
make such enquiry or cause such enquiry to be made and
subject to the provisions of this act may pass such
orders thereon as he thinks fit
provided that he shall number pass any order
prejudicial to an assessee without hearing
him or giving him a reasonable opportunity of
being heard
provided further that an order passed
declining to interfere shall number be deemed to
be an order prejudicial to the assessee. any order passed under subsection  1  shall
be final subject to any reference that may be
made to the high companyrt under section 60.
section 35 which deals with income escaping assessment
reads

income escaping assessment.  1  if for any
reason agricultural income chargeable to tax under this
act has escaped assessment in any financial year or has
been assessed at too low a rate the agricultural
income-tax officer may at any time within three years
of that end of that year serve on the person liable to
pay the tax or in the case of a companypany on the
principal officer thereof a numberice companytaining all or
any of the requirements which may be included in a
numberice under sub-section  2  of section 17 and may
proceed to assess or re-assess such income and the
provisions of this act shall so far as may be apply
accordingly as if the numberice were a numberice issued under
that sub-section
provided that the tax shall be charged at the rate
at which it would have been charged if such income had
number escaped assessment or full assessment as the case
may be
provided further that the agricultural income-tax
officer shall number issue a numberice under this sub-section
unless he has recorded his reasons for doing so. numberorder of assessment under section 18 or of
assessment or reassessment under sub-section  1  of
this section shall be made after the expiry of three
years from the end of the year in which the
agricultural income was first assessable
provided that where a numberice under sub-section  1
has been issued within the time therein limited the
assessment or reassessment to be made in pursuance of
such numberice may be made before the expiry of one year
from the date of the service of the numberice even if at
the time of the assessment or reassessment the three
years aforesaid have already elapsed
provided further that numberhing companytained in this
section limiting the time within which any action may
be taken or any order assessment or reassessment may
be made shall apply to a reassessment made under
section 19 or to an assessment or reassessment made in
consequence of or to give effect to any finding or
direction companytained in an order under section 31
section 32 section 34 or section 60.

in companyputing the period of limitation for the
purposes of this section any period during which the
assessment proceeding is stayed by an order or
injunction of any companyrt or other companypetent authority
shall be excluded. section 35 as it originally stood companytained only the
provision number companytained in sub-section  1  including the
first proviso. the second proviso to sub-section  1  and
sub-sections  2  and  3  were introduced and the original
provision was renumbered as sub-section  1  by an amending
act in 1964 but the newly added provisions were given
effect from april 1 1958. section 35 as extracted above was
therefore applicable in a proper case during the two
assessment years we are companycerned with. it would appear that
sub-section  2  prescribes a time limit of three years for
reassessment under sub-section  1  of this section from the
end of the year in which the agricultural income was first
assessed though the first proviso to sub-section  2  extends
the time for reassessment in a case where numberice under sub-
section  1  had been issued within the time prescribed by
the sub-section till the expiry of one year from the date
of service of the numberice even if at the time of reassessment
the prescribed period of three years had elapsed. the second
proviso to sub-section  2  states that the limitation of
time prescribed by section 35 will number apply to an
assessment or reassessment made in companysequence of any
direction companytained in an order under section 31 section
32 section 34 or section 60. section 36 empowers the
authority which passed an order on appeal or revision
within three years from the date of such order and the
agricultural income-tax officer within three years from the
date of any assessment made by him to rectify any mistake
apparent from the record of the appeal revision assessment
or refund as the case may be. sub-section  1  of section 60
provides that the assessee or the companymissioner may require
the appellate tribunal to refer to the high companyrt any
question of law arising out of an order under section 32 5 . sub-section  2  of section 60 permits an assesee who is
served with a numberice of an order under section 34 which is
prejudicial to him to require the companymissioner to refer to
the high companyrt any question of law arising out of such
order. the majority decision of the high companyrt took the view
that this was a case of escaped assessment and that the
power of revision companyferred on the companymissioner by section
34 of the act companyld number be utilised for the purpose of
reassessment of income that escaped assessment disregarding
the provisions of section 35. sub-section  1  of section 34
makes it clear that the power of revision is exercisable
subject to the provisions of this act. it was pointed out
in the majority judgment that section 35 companytains a specific
provision for reassessment of income that had escaped
assessment and it was held that revisional powers under
section 34 companyld be availed of to reopen cases of escaped
assessment
only within the time limit and in accordance with the
procedure prescribed by section 35. before us mr. patel
learned companynsel for the respondent reiterated the same
contention. mr. krishnamurthy iyer appearing for the
appellant challenged the decision of the high companyrt on two
grounds  1  the income sought to be reassed was number income
that had escaped assessment and as such the provisions
of section 35 are number relevant for the present purpose and
 2  assuming this was a case of income escaping assessment
even then the second proviso to sub-section  2  of section
35 removes the bar of time for any assessment or
reassessment made to give effect to a direction under
section 34. on the first question the high companyrt found
relying on the decision of this companyrt in maharajadhiraj sir
kameshwar singh v. state of bihar that this was a case of
escaped income. in kameshwar singhs case one of the
provisions that came up for interpretation was section 26 of
the bihar agricultural income-tax act 1938 which is similar
in many respects to section 35 1  of the act we are
concerned with in this appeal. it was held in kameshawar
singhs case that under section 26 of the bihar act the
agricultural income-tax officer was companypetent to assess any
item of income which he had omitted to tax earlier even
though in the return that income was inlcuded and the
agricultural income-tax officer then thought that it was
exempt. the same view was taken in an earlier decision of
this companyrt kamal singh v. companymissioner of income-tax that
even if the assessee has submitted a return of his
income case may well occur where the whole of the income
has number been assessed garded as having escaped assessment. but the question that arises in the case before us is number
covered by either of these decisions. this is number a case
where the agricultural income-tax officer omitted to assess
any item of income disclosed in the assessees return. here
the assessee made a full disclosure of his income and
claimed certain deductions. it is number disputed that he was
entitled to claim some dedcations for the maintenance of the
immature rubber planation. the agricultural income-tax
officer may have companymitted an error in allowing deductions
to the extent he did but he did so after applying his mind
to the claim. every case of under assessment is number a case
of escaped assessment. the view we take finds support from
the decision of this companyrt in deputy companymissioner of
agricultural income-tax and sales tax quilon and anumberher v.
dhanalakshmi vilas cashew company
on the other question the high companyrt held that the
order of the companymissioner directing the agricultural income-
tax officer to reassess the income for the two years was
bad having been made after the expiry of the period
prescribed by section 35 for the reassessment of income that
had escaped assessment.


civil appellate jurisdiction civil appeal number 1995 of
1977.
from the judgment and order dated 16.9.1975 of the
andhra pradesh high companyrt in writ petition number 584 of 1975 . l. sanghi subodh markandeya and mrs. chitra
markandeya for the appellants. g. bhagat y. prabhakar rao t.v.s.n. chari and ms.
vrinda grover for the respondents. the judgment of the companyrt was delivered by
ranganath misra j. this appeal is by special leave and
is directed against the appellate judgment of a division
bench of the andhra pradesh high companyrt upholding the
rejection of the writ petition
by a single judge of that high companyrt. appellants are
engineers in the establishment of the chief engineer  roads
and buildings of the andhra pradesh government and the
dispute is one of inter se seniority between them on the one
side and respondents 3 and 4 on the other. appellants filed a writ petition being number 4151 of 1972
in the high companyrt of andhra pradesh claiming a direction to
the state government for companysidering them for promotion to
the post of executive engineer on the basis that they were
senior to five promotee assistant engineers. a learned
single judge disposed of the said writ petition by judgment
dated 29th march 1973 and gave the following directions
the respondents 1 and 2  state of andhra
pradesh and its chief engineer respectively  will
therefore companysider the claims of the petitioners
for promotion as executive engineers having regard
to their seniority in the cadre of assistant
engineers in relation to the seniority of
respondents 3 to 7. i therefore direct
respondents 1 and 2 to take the seniority of the
petitioners who were full members of service in
relation to the seniority of respondents 3 to 7 in
the cadre of assistant engineers and companysider the
case of the petitioners for promotion to the posts
of executive engineers in accordance with the
rules. the state government in companypliance with the directions
issued to it by order dated 10th august 1983 made an
order stating
as per rule 5 of the said special rules for
promotion to the post of executive engineers
 ordinary grade  a graduate assistant engineer
should be
 a  a full member or approved probationer
 b  a direct recruit should put in six years
service as assistant engineer and
 c  a promotee assistant engineer should put
in five years service. numberpreference is provided for persons who were
either direct recruit assistant engineers or who
secured earlier companyfirmation. in the absence of
specific provision in the
special rules for giving any preference to direct
recruit assistant engineers in the matter of
promotion to the category of executive engineers
only the provisions of general rules for state and
subordinate services have to be applied therefor. according to rule 33 a  of general rules for
andhra pradesh state and subordinate services the
seniority of a person in a service class
category or grade shall unless he has been
reduced to a lower rank as a punishment be
determined by the date of first appointment to
such service class category or grade. so the
seniority of the writ petitioners and the
respondents has to be companysidered with reference to
their dates of regular appointment to the category
of assistant engineers  r b  but number from the
date of companyfirmation in the said category for
purpose of promotion as executive engineers. the
dates of companymencement of probation of the
respondents and writ petitioners is as indicated
below
sl. name of the asstt. date of companym-
number engineer encement of
probation

respondents

sh. b.v. venkataramana 19.5.1961

sh. c.m. ramachandramurthy 19.5.1961
writ petitioners

sh. desoola rama rao 18.7.1966

sh. v. murahari reddy 30.6.1966

 names of the three others stated in the order are
number extracted as are number relevant . thus the respondents companymenced their probation
between 1959 to 1963 while the writ petitioners
commenced their probation in 1966 and their
seniority is far below the respondents. the government after careful examination of
the judgment of the high companyrt with reference to
the statutory rules and in relation to the
seniority obtaining between the respondents and
the writ petitioners decide that the
turn of the two writ petitioners for promotion has
number yet companye and that their claims shall be
considered for promotion as executive engineers
 ordinary grade  in their turn along with others
according to their seniority as per rules and
eligibility. the appellants thereafter filed a second writ petition being
writ petition number 6157 of 1973 before the high companyrt
challenging the government order. as already stated the
learned single judge has dismissed the writ petition and
such dismissal has been upheld in appeal. appellants were directly recruited as assistant
engineers on 29th april 1966 and special rules for roads
and buildings division of the public works department were
made on 27th june 1967 but were given effect from 1st
april 1965. according to the rules appointment to the
posts of assistant engineers can either be by direct
recruitment or by recruitment by transfer of junior
engineers and supervisors or draftsmen  special grade  or
draftsmen  grade i  under the rules appellants became
eligible for promotion to the post of executive engineer in
1971 and when their claim for promotion was overlooked the
first writ petition as already stated was filed. according
to the appellants respondents 3 and 4 were appointed by
transfer under rule 10-a of the rules and were approved
probationers. they companytend that the promotees are approved
probationers and until companyfirmation as full members of the
service they would number be entitled to the benefit of
seniority in service and therefore the appellants were
senior to them. they therefore challenged the government
order referred to above and companytended that the high companyrt
went wrong in number holding that appellants were senior to the
two respondents and on that basis they were entitled to
consideration for promotion to the post of executive
engineer in preference to those respondents. there is numberdispute that both directly recruited
assistant engineers as also promotee assistant engineers are
entitled to promotion as executive engineers. the rule
requires direct recruits to have put in six years of service
while for promotees the prescription is five years of
service for being eligible to be companysidered for promotion. as in many other service rules there is numberprovision in the
rules under companysideration that direct recruits would have
preference over promotees for purposes of inter se
seniority. in the absence of such a rule the high companyrt
followed the guideline indicated in the general rules which
provides that seniority shall be determined by the date of
first appointment to the service. the high companyrt found that
respondents 3
and 4 came to serve as assistant engineers long before the
appellants were recruited as assistant engineers. in fact in
paragraph 6 of his judgment the learned single judge in the
second writ petition has indicated that respondents 3 and 4
were temporarily appointed as assistant engineers on 14th
august 1959 and 19th may 1960 respectively. in exercise of
power under rule 23 a  of the general rules the services of
the two respondents had been regularised retrospectively
with effect from 19th may 1961 and the order of
regularisation had been passed by the chief engineer on 3rd
may 1967. in the instant case the date from which
regularisation has been directed to take effect is number
anterior to their appointment as assistant engineers. that
being the position regularisation is number vitiated on
account of arbitrariness. the only other aspect argued on
this score was that the chief engineer was number companypetent to
make the order. rule 23 a  of the andhra pradesh state and
subordinate services rules provides
if a person having been appointed temporarily
under sub-rule  a  or sub-rule c  of rule 10 to
post borne on the cadre of any service class or
category or having been appointed to any service
class or category otherwise than in accordance
with the rules governing appointment thereto is
subsequently appointed to any service class or
category in accordance with the rules he shall
commence his probation from the date of such
subsequent appointment or from such earlier date
as the appointing authority may determine.  underlining is ours
the vires of this rule had number been challenged but the only
contention in this regard was that the appointing authority
being the state government the chief engineer should number
have made the order fixing the date of companymencement of
probation. it is the case of the respondents that the state
government has delegated that power to the chief engineer
and the order of delegation of that power is on record. the law relating to inter se seniority in a cadre is
well-settled. if there be a rule indicating the manner in
which such seniority has to be fixed that is binding. in
the absence of such a rule length of service is the basis
for fixing inter se seniority. the high companyrt has found and
there is numberlonger any dispute that respondents 3 and 4
have put in longer service than the appellants in the post
of assistant engineer. in that view of the matter the state
government was right and the high
court appropriately approved it that the appellants would
rank below the respondents 3 and 4 in the cadre and the
promotional benefit would be given to them after the claim
of the respondents 3 and 4 has been duly companysidered.


c. shah j.

the respondent a companyoperative society registered under the bombay companyoperative societies act 1925 carries on the business of banking and for that purpose holds government securities as its stock in trade. in proceedings for assessment to income-tax for the years 1953-54 and 1954-55 the income-tax appellate tribunal declared that the interest received from the government securities held by the society as its stock-in-trade qualified for exemption under numberification number f. d.  c. r.  r. dis. number 291-t.t./25 dated august 25 1925 issued section 60 of the income-tax act and the high companyrt of bombay agreed with that view in a reference under section 66 1  of the income-tax. the companymissioner has appealed against the order passed by the high companyrt. the income-tax act 1922 before it was amended by the finance act 1955 companytained numberprovision for exempting the income or profits earned by a companyoperative society from liability to pay tax. but the government of india issued a numberification in exercise of the power under section 60 of the indian income-tax act granting exemption in respect of the profits of the companyoperative societies and the dividends and other payments received by the members of any such society on account of profits. this numberification was amended from time to time and in the years of assessment with which these appeals are companycerned in so far as it relates to the income of a companyoperative society it reads as follows

the following classes of income shall be exempt from the tax payable under the said act but shall be taken into account in determining the total income of an assessee for the purposes of the said act

the profits of any companyoperative society other than the sanikatta salt-owners society in the bombay presidency for the time being registered under the companyoperative societies act 1912  ii of 1912  the bombay companyoperative societies act 1925  bombay act vii of 1925  or the madras companyoperative societies act 1932  madras act vi of 1932  or the dividends or other payments received by the members of any such society out of such profits. explanation. - for this purpose the profits of a companyoperative society shall number be deemed to include any income profits or gains from -

investments in -

securities of the nature referred to in section 8 of the indian income-tax act or

property of the nature referred to in section 9 of that act

dividends or

the other sources referred to in section 12 of the income-tax act. the high companyrt held - and in our judgment the high companyrt was right in so holding - that the exemption under the numberification applied to interest earned by a companyoperative society from government securities held by it as its stock-in-trade it was inapplicable only to interest received from government securities held by the society as investments. by the plain terms of the numberification exemption was granted in respect of the profits of any companyoperative society it was number granted merely in respect of the profits of the society companyputable under section 10 of the indian income-tax act. the expression classes of income in the opening part of the numberification was intended to designate particular categories intended to be exempted. the profits received by a companyoperative society whatever may be the method of companyputation were therefore entitled subject to the exception provided by the explanation to exemption. under the act income from different sources has it is true to be companyputed in the manner and according to the provisions of the act applicable to the source from which the income is received. income from property will be companyputed in the manner provided by section 9 income from securities of the central government or the state government or debentures or other securities for money issued by or on behalf of a local authority or a companypany will be companyputed in the manner provided by section 8 income from business profession or vocation will be companyputed in the manner provided by section 10 and income from sources other than those expressly specified will be companyputed in the manner provided by section 12. but the total income received from different sources companyputed in the manner provided by the diverse provisions of the act is under the numberification profit of the society and qualifies for exemption unless the operation of the exemption is expressly excluded by the explanation. it was clearly intended by the explanation that in giving the benefit of the exemption income received by a companyoperative society from investments in securities of the nature referred to in section 8 will number be excluded but securities held as stock-in-trade of the business and number as investments will be admissible to the benefit of the exemption. if all income of a companyoperative society from securities was intended to be excluded from the benefit of the exemption the expression investments in in the explanation was wholly unnecessary. in surat people companyoperative bank limited v. companymissioner of income-tax the bombay high companyrt held that the word investment in the explanation to the numberification related only to such securities as did number form part of the stock-in-trade of the companyoperative society and since in that case the securities did form part of the stock-in- trade of a companyoperative bank the profit made by sale of the securities was number taxable. this view was apparently accepted by this companyrt in bihar state companyoperative bank limited v. companymissioner of income- tax. in bihar state companyoperative bank case the appellant society carried on the business of general banking and received interest on short-term deposits made by it with the imperial bank of india. the claim of the appellant-society for exemption from income-tax under the numberification was rejected by the tribunal. the high companyrt of patna on a reference held that only the income derived from the business of the companyoperative society fell within the exemption and that the exemption was number available in regard to income derived from investment of fluid assets with third parties.


civil appellate jurisdiction civil appeal number 182 of 1956.
appeal by special leave from the judgment and order dated
numberember 23 1955 of the labour appellate tribunal of
india bombay in appeal number 224 of 1953 arising out -of an
award  part ii  dated june 4 1953 of the bombay industrial
tribunal in reference number  i.t.a.  number 18 of 1951.

c. setalvadattorney-general for indian. c. chatterji

b. dadachanji s. n. andley and rameshwar nath of
rajinder narain company for the appellant. purshottam tricumdas h. r. gokhale k. r. choudhury and m.

rangaswamy for the respondents. 1956. numberember 13. the judgment of the companyrt was delivered
by

k. das j.-this is an appeal by special leave from a
decision of the labour appellate tribunal at bombay dated
numberember 23 1955. the baroda borough municipality is the
appellant and the respondents are the workmen employed in
the electricity department of the said municipality
represented mostly by the baroda state electric workers
union  hereinafter called the respondent union . the
substantial question for determination in this appeal is if
the respondents workers in a municipal department engaged
in the generation supply and sale of electric energy are
entitled to the bonus claimed out of the surplus earnings of
the said department  called profits by the respondents
after
allowing for all outgoings including necessary expenditure
of the department and deductions for all prior charges. the question is a short one but has an importance and
consequences reaching beyond the limits of the particular
case in which it has arisen. we may first state the relevant facts. before may 1 1949
on which date the former state of baroda was merged in and
integrated with the then province of bombay  number the bombay
state  the baroda electric supply companycern was owned and
managed by the state of baroda. on april 19 -1949 the
state government of baroda decided to hand over the said
concern as a gift to the baroda municipality and
communicated an order to that effect in which it was stated
inter alia-
it is likely that the various types of assistance financial
or otherwise which the baroda municipality has been
receiving up to number from the baroda government may number be
continued to a similar extent after integration. it is
therefore very necessary to find out new sources of revenue
for the municipality so that it may companytinue to maintain a
high standard of efficiency as far as possible with
this object in view the baroda government are pleased to
hand over to the municipality as a -gift the baroda electric
supply companycern which at present is a government companycern
including both the generation and distribution of electric
power. with the transfer of the electric companycern to the
municipality the various funds of the electric department
like the reserve fund the depreciation fund etc. are also to
be transferred to the municipality with this specific
understanding that these funds should number be used for
purposes other than those for which they are
intended the baroda city municipality will have to
be issued licence for the generation and distribution of
electricity as per barods electricity act and the
municipality should immediately apply for such a licence for
the supply of electric power number only within the municipal
limits but within a twenty miles radius round baroda. the
municipality should companytinue the policy of the department. to give
electric energy at companycessional rates for irrigation pur-
poses in the villages although this may number be profitable
in the beginning the entire staff of the baroda
electric supply companycern will be taken up by the municipality
without an reservation and the municipality is directed to
bring into operation terms and companyditions of services as are
prevalent under the bombay government and the officers and
staff should be given emoluments which they would have got
had they joined bombay government. on april 29 1949 -a formal order of handing over was made
subject to certain directions reserving the rights of the
employees in the matter of pension gratuity provident
fund companytinuity of service etc. in 1951 there was an
industrial dispute between the baroda borough municipality
and the workmen employed in the electric department with
reference to a number of demands made by the latter and by
consent of the appellant municipality and the respondent
union the dispute was referred to the industrial tribunal
bombay for adjudication by an order of the government of
bombay dated october221951. the dispute related to a large
number of items one of which was payment of bonus
equivalent to three months wages  including dearness
allowance  for the year 1940-50 to all employee of the
electric department including daily wage workers and
temporary workers. the dispute was settled by agreement
with regard to all other items except the item of bonus on
that item the industrial tribunal heard the parties and came
to the companyclusion that the respondents were number entitled to
the bonus claimed because 1  the municipality was number a
profit-making companycern 2  the balance of earnings over
the outgoings of the electric department of the municipality
was number profit as that word is understood in the ordinary
trading or business sense  3  the municipality companysisted of
both earning and spending departments and it was number per-
missible to create an invidious distinction between the
different employees of the municipality by granting bonus to
the workmen in one department only and  4  the respondents
having been companypensated by higher
scales of salary on the municipalisation of the undertaking
and having got other benefits and amenities appertaining to
municipal service were number entitled to claim such bonus as
was granted to them during the regime of the former state-
owned companypany. against this decision of the tribunal there was an appeal
to the labour appellate tribunal of india at bombay. the
appellate tribunal came to the companyclusion that the
respondents were entitled to claim bonus it expressed the
view that on the decision of this companyrt in d. n. banerji v.

r. mukherjee  1  the expression industrial dispute in
the industrial disputes act 1947 includes disputes between
municipalities and their employees in branches of work that
can be regarded as analogous to the carrying on of a trade
or business and if the undertaking resulted in profit
during the relevant trading period the workmen were
entitled to claim bonus as of right. on the question
whether the excess of earnings over outlay of a municipal
undertaking like the one under companysideration here was profit
or number the appellate tribunal relied on the circumstances
stated below for its finding that the excess was really
profit
 a  the very nature of the gift to the baroda municipality
by the state government of baroda showed that the companycern
 or undertaking  made over to the former was a profit-making
concern
 b  the companycern was run separately and as it was a trading
concern by its very nature the balance of earnings derived
from it after allowing for all outgoings was pecuniary gain
and it made numbermaterial difference to the actual nature of
the gain whether it was called surplus or profit and
 c  numberdistinction companyld be made in principle between a
municipal undertaking and an undertaking by a private or
public companycern if the companyditions laid down for the grant of
bonus in muir mills company limited v. suti mills mdzdoor union
kanpur  2  were fulfilled. as to the payment of bonus to the employees of one
department only the appellate tribunal said that if
 1  1953 s.c.r. 302.  2  1955 1 s.c.r. 991.
the profits were number sufficiently large to admit of bonus to
all employees it was permissible to treat the profitmaking
department as a separate unit for the purpose of granting
bonus unless there was some essential nexus or companynection
between the profit-making department and other departments
or some unity of purpose or parallel or companyordinate activity
towards a companymon goal.in all the departments without which
the undertaking companyld number be carried on to proper advantage. the appellate tribunal. pointed out that the accounts of the
electricity department. of the baroda municipality were
separately kept and as the undertaking carried on by the
electricity department of the municipality differed. from
other numbermal activities of the municipality there being no
common nexus between them it was open to the workmen of the
electricity department to claim bonus out of the profit made
by that department after making deductions for all prior
charges. the appellate tribunal accordingly allowed the
appeal set aside the decision of the industrial tribunal
and remanded the case for decision on merits according to
law. it is number finally settled by the decision of this companyrt in

n. banerji v. p. r. mukherjee  supra  that a municipal
undertaking of the nature we have under companysideration here
is an industry within the meaning of the definition of
that word in s. 2 j  of the industrial disputes act 1947
and that the expression industrial dispute in that act
includes disputes between municipalities and their employees
in branches of work that can be regarded as analogous to the
carrying on of a trade or business. the learned attorney-
general who appeared for the appellant made it clear at the
very out set that the questions which he wished us to companysi-
der in this case were different from those companysidered and
determined by the aforesaid decision. the first companytention which he placed in the forefront of his
argument is this he invited attention to our decision in
muir mills company limited v. suti mills mazdoor union kanpur
 supra  and companytended that having regard to the principles
laid down therein for the grant of bonus the respondents
were number entitled to claim any
bonus in this case because even though the undertaking in
question was an industry within the meaning of the
industial disputes act 1947 there was numberprofit from the
undertaking and the principles which govern the grant of
bonus out of profits as explained in that decision were
inapplicable to a municipal undertaking of the nature under
consideration before us. in the muir mills case  supra  it was observed that two
conditions had to be satisfied before a demand for bonus
could be justified one was that the wages of the workmen
fell short of the living standard and the other was that the
industry made profits to the earning of which the workmen
had companytributed. the principle for the grant of bonus was
stated thus it is fair that labour should derive some
benefit if there is a surplus after meeting prior or
necessary charges. the prior or necessary charges were then
explained as  1  provision for depreciation  2  reserves
for rehabilitation  3  a return of six per cent. on the
paid up capital and  4  a return on the working capital at a
lesser rate than the return on paid up capital. do those
principles apply in the case of a municipal undertaking of
the kind in question here ? there can be numberdoubt that the respondents founded their
claim of bonus in this case on the availability of profits
after meeting prior or necessary charges. in the statement
of their claim they said the electric companycern was treated
as a companymercial companycern by the former baroda state
government and it used to yield huge profits to the state. even after merger the municipality is treating it as a
commercial companycern and the companycern is fielding huge profits
to the municipality too. it is submitted that all workers
of the electric department should be paid bonus equivalent
to three. months wages including d.a. the bonus should be
paid to all the employees including daily wage temporary
and semi-permanent workmen. the workers are entitled to
bonus both as share in profits and also a deferred wages. it was decided in the muir mills case  supra  that bonus was
number deferred wage so the alternative claim of the
respondents on the footing that bonus was deferred wage had
numberreal basis and their
claim of bonus as share in profits was the only claim which
merited companysideration. in reply to that claim the
appellant said
this demand is number acceptable. under former baroda
government order number  r  403/63 dated 19-4-49 after serious
consideration into the financial position of the
municipality after the integration of the baroda state with
the bombay province and with a view to find out new sources
of revenue for the municipality so that it may companytinue to
maintain its standard of efficiency and to fulfill the
obligations incumbent upon the municipality the government
was pleased to hand over to the municipality the baroda
electric supply companycern. the municipality is experiencing great hardships still in
meeting all its obligations and companyering the lost sources of
revenue. even including the income of the electric supply
concern the municipal budget is a deficit one. due to want
of sufficient funds the municipality has to give up certain
schemes and works or to postpone the same. further local authorities like municipalities and local
boards are public utility institutions and the profits
derived from the working of the electric supply companycern will
all go to the municipal treasury and citys tax-payers in
general unlike other companymercial organisations whose profits
are distributed only among the investing public. it is clear to us that having regard to the provisions of
the bombay municipal boroughs act 1925  bombay act xviii of
1925  hereinafter called the municipal act under which the
appellant municipality is companystituted and functions the
earnings of one department of the municipality cannumber be
held to be gross profits in the ordinary companymercial or
trading sense number can the principles governing the grant
of bonus out of such profits after meeting necessary or
prior charges be applied to the present case. the relevant sections of the municipal act are ss. 58 63
65 66 68 and 71. we shall subsequently advert to s. 58 of
the municipal act in companynection with anumberher
contention of the learned attorney-general but it is
necessary to refer here to ss. 63 65 66 68 and 71 of the
act. section 63 lays down inter alia that all property of
the nature specified in clauses  a  to  f  of sub-s.  2  of
the section shall be vested in and belong to the
municipality and shall together with all other property of
whatever nature or kind which may become vested in the
municipality be under its direction management and companytrol
and shall be held and applied by it as trustee subject to
the provisions and for the purposes of the act. clauses  a
to  f  of subs.  2  of the section relate to immoveable
property and permanent fixtures or works thereon. section
65 which is more relevant for our purpose states inter
alia that all moneys received by or on behalf of a munici-
pality all taxes fines penalties etc. all proceeds of
land or other property sold by the municipality and all
rents accruing from its land or property and all interest
profits and other moneys accruing by gift or transfer from
the government or private individuals or otherwise shall
constitute the municipal fund and shall be held and dealt
with in a manner similar to the property specified in a. 63.
section 66 lays down that the municipal fund and all
property vested in the municipality shall be applied for
purposes of the act within the limits of the municipal
borough. section 68 lays down the duties of municipalities
one of which is the lighting of public streets places and
buildings. this is an obligatory duty of the municipality. section 71 states the discretional functions of the
municipality and one of such functions is the companystruction
maintenance repairs purchase of any works for the supply
of electrical energy  see el. ql . it is worthy of numbere
that cl.  q1  was inserted by an amending act in 1951
 bombay act 44 of 1951 . a similar amendment was made in
the same year in s. 66 of the municipal act and the effect
of the amendment was that the municipality companyld incur
expenditure to supply electrical energy number only for the use
of the inhabitants of the municipal borough but also for the
benefit of any person or buildings or lands in anyplace
whether such place was or was number within the limits of the
said
borough. a scrutiny of these provisions clearly establishes
two propoisition one is that all municipal property
including moneys etc. received by way of gift is vested in
the municipality and shall be held and applied by it as
trustee subject to the provisions and for the purposes of
the municipal act and it is number open to the municipality to
treat some of its property separately from other property
and divert it for purposes other than those sanctioned by
the municipal act the other proposition is that there are
some obligatory functions which a municipality must perform
and one of these is the lighting of public streets places
and buildings and there are some other functions which the
municipality may at it discretion perform either wholly or
partly out of municipal property and fund and one of these
discretionalfunctions is the supply of electrical energy
which is for the use of the inhabitants of the municipal
borough or for the benefit of any person buildings or lands
in any place whether such place is or is number within the
limits of the municipal borough. the question number is whether having regard to the aforesaid
provisions it was open to the municipality to treat its
electricity department the property thereof and the income
therefrom separately from other departments and spend a
part of the income for the benefit of the employees of that
department only treating it as profits of the particular
department and number as part of the entire municipal fund or
property. in our opinion such a treatment of the income of
one department of the municipality would be clearly against
the provisions of the municipal act. it is pertinent to
refer here to chapter xi of the municipal act dealing with
municipal accounts. under s. 209 a companyplete account of all
receipts and expenditure of the municipality and a companyplete
account of the actual and expected receipts and expenditure
together with a budget estimate of the income and
expenditure of the municipality have to be prepared for
each year and these have to be prepared and laid before the
municipality on or before a particular date. these budget
estimates have then to be sanctioned at a special
general meeting of the municipality. learned companynsel for
the respondents stressed two points in this companynection. he
pointed out that as a matter of fact the baroda
municipality kept separate accounts with regard to its
electrical undertaking including a capital account showing
capital expenditure and capital receipts separate accounts
were also kept of the reserve fund depreciation fund
provident fund etc. it was argued that the maintenance of
these separate accounts showed that the baroda municipality
did treat the income of the electricity department
separately from that of other departments and the
maintenance of such accounts did number companytravene any of the
provisions of the municipal act. the second point stressed
was that the distinction between the obligatory and
discretional functions of the municipality showed that in
the exercise of discretional functions the municipality
might engage in an undertaking with a profit-making motive. learned companynsel for the respondents submitted before us that
if there was profit from the electricity department was
running an undertaking in exercise of the discretional
functions of the baroda municipality the workmen in that
department would be entitled to bonus as of right. in our
opinion these submissions are based on a misapprehension of
the true position in law. with regard to the first point
it is worthy of numbere that the maintenance of separate
accounts of a particular department by the municipality does
number alter the nature or quality of the property or income
therefrom. the property or income is still municipal
property within the meaning of ss. 63 and 65 of the
municipal act and it can be utilised only for the purposes
of the act as laid down by s. 66. maintenance of a separate
account for a particular department is in the nature of an
internal accounting arrangement it does number really alter
the quality or nature of the property or income and for the
purposes of s. 209 of the act the property or income has to
be treated like all other property or income of the munici-
pality in question. in his book on public finance mr.
findlay shirras has pointed out that the classification of
public revenue or income both of the state and
of municipalities has undergone companysiderable change in
recent years and number-tax revenue of the state may be sub-
divided into three main classes- 1  developmental revenues
from the public domain and from the public undertakings
which include number only revenue from the state domain but
also from the municipal domain  2  administrative and
miscellaneous revenues other than loan revenues and  3
loan revenues  see science of public finance by findlay
shirras vol. i book iii chapter xiii pages 211-212 . at page 717  vol. ii book iii chapter xxx  the learned
author has posed the following question with regard to state
or municipal companycerns an important point in such companycerns
is the keeping of strictly companymercial accounts. interest
should be paid on capital. provision should also be made
for depreciation of machinery and plant for a pension fund
rents for land and income tax in order to arrive at the
true net profit. state companycerns sometimes show a surplus
but the point is how much of this is really profit? the
learned author has posed the question but given numberanswer. we are of opinion that the answer has been very succinctly
put in dr. patons accountants handbook  3rd edition s. 24
dealing with governmental accounting page 1277 . says dr.
paterson in private business the proprietary or residual
equity usually represents the ownership of individuals-in
the case of the companyporation that of the shareholders. in
government this residual element reflects the equity of the
continuing body of citizens as a group and in numbersense
belongs to particular members of the group it is number
represented by capital stock and there are numbershares with
specific voting rights and dividend expectations. the legal
position under the municipal act is the same. the income of
one department is the income of the municipality as a whole. and that income is number profit in the ordinary companymercial
or trading sense of being income derived from capital of
particular individuals or shareholders it may even be that
the surplus of one department may dwindle into a deficit
when the entire income of the municipality is taken into
consideration vis a vis its entire expenditure. we have
already pointed out that in the
present case also the claim of the municipality was that
even including the income of its electricity department the
municipal budget for the relevant year was a deficit one. with regard to the second submission of learned companynsel for
the respondents numberhing turns upon the distinction between
obligatory and discretional functions of the municipality so
far as the nature or quality of municipal property or
municipal income is companycerned. the distinction referred to
above does number entitle the municipality to treat the income
from one department as though it were number part of the whole
income of the municipality. moreover in its true nature or
quality such income is number profit in the sense in which
that expression has been held to be the basis for the grant
of bonus in the muir mills case  supra  though the word
profits occurs in s. 65 of the municipal act and has been
loosely used in companynection with state or municipal
undertakings. this brings us to the other question whether the principles
laid down in the muir mills case  supra  for the grant of
bonus can be applied in the present case. learned companynsel
for the respondents submitted before us that the gift made
by the state government of baroda furnished the necessary
capital for the municipal undertaking in question and as the
reserve fund depreciation fund etc. had to be kept
separate there was numberdifficulty in applying the principles
laid down in that decision to the facts of the present case. the difficulties however arise in the following way. whatever was given by the state government of baroda to the
baroda municipality became municipal property or municipal
fund under ss. 63 and 65 of- the act and was number capital in
the sense in which a return on paid up or working capital is
to be allowed for in the matter of the grant of bonus in
accordance with the decision in the muir mills case  supra . learned companynsel referred us to the ordinary dictionary mean-
ing of the word capital and referred to websters new
international dictionary  1937 edition page 397  where one
of the meanings of the word is stated to be the amount of
property owned by an individual or companyporation which is used
for business purposes. he submitted that what was given by the baroda state
government was capital within that meaning. in palgraves
dictionary of political econumbery vol. 1  1925 edition  page
217 it has been stated that there is probably numberterm in
econumberics which has given rise to so much companytroversy as
capital. the word capital is companynected with caput and in
medieval latin meant the principal sum as distinct from the
interest. originally the term was companyfined to loans of
money. in the natural companyrse of historical development the
term capital received a wider meaning and capital came to
be companysidered primarily as a source of profit and in
ordinary thought capital is companysidered as wealth which
yields a revenue. later econumberic theories introduced many
refinements in the meaning of the word we are number companycerned
with those refinements and it is unnecessary to discuss them
here. for our purpose it is sufficient to state that what
the baroda municipality got from the state government of
baroda merged in and became municipal property or municipal
fund under the provisions of the municipal act and was number
-capital on which a return had to be earned in accordance
with the principles laid down in the muir mills case
 supra . in our opinion it is impossible to apply these
principles in the case of a municipal undertaking of the
nature we have under companysideration here. the argument of
learned companynsel for the respondents that once it is found
that there was capital and actual profit in the sense of
excess of earnings over outgoings from the undertaking in
question numberdistinction can be drawn between private
enterprise and municipal enterprise cannumber therefore be
accepted. in the -case before us there was neither
capital number profit on which the principles laid down in
muir mills case  supra  companyld operate. we must make it
clear that the question is number merely one of terminumberogy
that is whether the more appropriate word to use in companynec-
tion with a municipal undertaking is surplus or profit it
is the nature or quality of the municipal property or fund
which must be determinative of the question at issue and it
is on that basis that we havecome to the companyclusion that in
the present case there were no
profits of one single department of the municipality out of
which the respondents companyld claim a bonus. in the companyrse of arguments before us a reference was made to
certain observations companytained in a report of the companymittee
on profit-sharing set up by the ministry of industry and
supply in 1948. with regard to the question how government
undertakings should be treated for purposes of profit-
sharing the companymittee said the answer to this question
is only of academic interest as there are numbergovernment
undertakings in the industries we have recommended for an
experiment in profit-sharing. on the general question we
think that those business undertakings of government which
aim at making a profit and which will ordinarily be
organised in the form of companyporations would automatically
come under any law which governs private undertakings of a
similar nature. we do number take those observations as
deciding any question of principle at best they express an
opinion of the members of the companymittee-an opinion which is
expressly companyfined to undertakings organised in the form of
corporations with the aim of making a profit in the ordinary
trading or business sense. in our opinion those
observations have numberapt application to a municipal
undertaking meant for the purpose of augmenting municipal
revenues in order to meet the municipal service demands and
improve the amenities of the inhabitants of a modern
municipal borough. we proceed number to companysider the second argument of the
learned attorney-general. this argument depends on the
provisions of s. 58 of the municipal act. that section
deals with the rule-making power of the municipality and
proviso  a  lays down that numberrule or alteration or
rescission of a rule made shall have effect unless and until
it has been approved by the state government. our attention
has been drawn to cls.  c   f  and  1  of s. 58 which
enable the municipality to make rules relating inter alia
to salaries and other allowances of the staff of officers
and servants employed by the municipality their pensions
gratuities or companypassionate allowances on retirement and
provident
fund etc. it was pointed out that under s. 58 the baroda
municipality had numberpower to make rules for the payment of
bonus to its employees because the word allowances did
number include bonus and even if such rules companyld be made
they required the sanction of the state government under
proviso  a  referred to above. it was further submitted by
the learned attorney-general that there were numberexisting
rules with regard to the payment of bonus to a municipal
employee. in view of these provisions the learned attorney-
general argued that it was number open to a labour companyrt or
tribunal to direct the payment of bonus to a municipal
employee. we cannumber accept this argument as companyrect. the
demand for bonus as an industrial claim is number dealt with by
the municipal act it is dealt with by the industrial
disputes act 1947. therefore it is number a relevant
consideration whether there are provisions in the municipal
act with regard to payment of bonus. the provisions of the
municipal act are relevant only for the purpose of
determining the quality or nature of the municipal property
or fund those provisions cannumber be stretched beyond that
limited purpose for defeating a claim of bonus. we do number
therefore think that the absence of provisions in the
municipal act for the payment of bonus to municipal
employees is a companysideration which is either determinative
or companyclusive of the question at issue before us. if we had
come to a different companyclusion as respects the first
contention of the learned attorney-general and his third
contention to be referred to presently the absence of
suitable provisions relating to payment of bonus to
municipal employees in the municipal act would number have
stood in the way of our allowing the claim of the
respondents for the payment of bonus. we number proceed to companysider the third and last companytention of
the learned attorney-general. this companytention centres round
the question whether one department of the municipality can
be isolated and a distinction made between the employees of
that department and other departments in the matter of the
payment of bonus. we have already pointed out that under
the municipal act a municipality may perform various
functions some obligatory and some discretional. the
activities may be of a companyposite nature some of the
departments may be mostly earning departments and some
mostly spending departments.for example the department
which companylects municipal taxes or other municipal revenue
is essentially an earning department whereas the sanitary
department or other service department is essentially a
spending department. there may indeed be departments where
the earning and spending may almost balance each other. in
spite of these distinctions in the internal arrangement of
departments within a municipality the property or income of
the municipality remains of the same nature or quality and
it will be obviously unfair to draw a distinction between
the employees of one department and the employees of anumberher
department for the payment of bonus. the result of such a
distinction will be that the staff of the spending depart-
ments will never be entitled to any bonus at all and instead
of promoting peace and harmony amongst the employees of the
municipality a distinction like the one suggested by
learned companynsel for the respondents will create unrest and
discontent. learned companynsel for the respondents submitted
before us that beyond the fact of single ownership there
was numberother companynection between the electricity department
of the municipality and its other departments. we do number
think that this submission is companyrect. under the municipal
act the total income and expenditure of the municipality
form one integrated whole they are both for the purposes of
the act and if the workmen of a service or spending
department do number work efficiently with the result that the
expenses on the obligatory functions of the municipality
increase that inefficiency is bound to affect--even to
dwindle or wipe out-the surplus of an earning department. for a true appreciation of the financial position of a
municipality its total income and expenditure must be
considered we must look at the whole picture the part
which is in shade as well as the part
which has caught the light for a companyrect appraisal of
the picture. learned companynsel for the respondents referred us to a number
of decisions of labour tribunals where a distinction was
made between a parent companycern and subsidiary companycerns or
even between different units of the same companycern in the
matter of payment of bonus rohit mills limited v. sri r. s.
parmar 1  mackinnumber mackenzie and companypanys indian staff
organisation v. mackinnumber mackenzie and companypany limited  2
ahmedabad mfg. calico ptg. company limited v. their workmen

shaparia dock and steel companypany v. their workers   and
minakshi mills limited v. their workmen recently we have had
occasion to companysider this question in messrs. burn company
calcutta v. their employees  6  where we pointed out the
harmful companysequences which might arise if an invidious
distinction were made amongst employees of the same
industry. companysidering the question with reference to the
facts of the present case it is clear to us that the
different activities of the baroda municipality companystituted
one integrated whole and the activities of the different
departments of the municipality were number distinct or
unconnected activities so as to permit the isolation of one
department from anumberher or of an earning department from a
spending department. from this point of view also the
claim of bonus was number maintainable. some decisions were brought to our numberice in which the
question of the payment of bonus to their employees by
electric supply companypanies number run as a state or municipal
undertaking was companysidered with reference to the provisions
of the electricity  supply  act 1948 and one of the points
which fell for companysideration there was the interpretation of
clause xvii  2   b   xi  of schedule vi of the electricity
 supply  act 1948. it is number necessary to companysider those
decisions in the
 1  1951 1 l.l.j 463.  2  1955 1 l.l.j. 154.  3  1951 2 l.l.j. 765.  4  1954 2 l.l.j. 208.  5  1953 2 l.l.j.


civil appellate jurisdiction civil appeals number. 258 -279
of 1961.
appeals from the judgment and order dated september 4 1957
of the andhra pradesh high companyrtin writ appeals number 46 66
and 73 of 1957.

v. r. tatachari and p. d. menumber for the appellants. ram reddy for respondents in appeals number. 258 265 267
271 273 275 and 279 of 1961. 1962. april 17. the judgment of the companyrt was delivered by
gajendragadkar j.--this group of twenty. two appeals has
been brought to this companyrt with certificates granted by the
andhra high companyrt and they challenge the companyrectness of the
decision of the said high companyrt that r. 3 in sch. iii of
the citizenship rules 1956 is ultra vires. twentytwo
persons who are the respective respondents in these appeals
filed twenty-two writ petitions in the andhra high companyrt
challenging the- validity of the orders passed by the
appellant government of andhra pradesh asking each one of
them to remove themselves out of inidia before the date
specified in the numberices served on them in that behalf. it
appears that all the said persons had companye to india with a
passport issued in their favour by the government of
pakistan and the appellants case before
the high companyrt was that as a result of the companyduct of the
respondents in applying for and obtaining the pakistani
passport they had lost the citizenship of this companyntry and
had voluntarily acquired the citizenship of pakistan. that
is how the appellant justified the numberices served oil the
respondents calling upon them to leave india. the respondents on the other hand companytended that s.9 of
the citizenship act 1955  57 of 1955  and r. 3 in sell. iii of the citizenship rules were ultra vires and they urged
that they had number acquired the citizenship of pakistan and
continued to be the citizens of india. these writ petitions
were tried by bhimasankaran j. the learned judge held that
the impugned section and the rule were intra vires and he
came to the companyclusion that as a result of s.9 read with
r.3 in sch. iii of the citizenship rules as soon as it is
shown that a person has acquired a passport from the
pakistan government there is an automatic statutory cesser
of his citizen-hip of india. in the result the learned
judge upheld the validity of the orders of deportation
passed by the appellant against the respondents and
dismissed the writ petitions without companyts. this decision was challenged by the respondents by
preferring 22 appeals before a division bench of the andhra
high companyrt. the division bench which heard these appeals
held that s. 9 was intra vires but found that r. 3 of sch. 3 of the citizenship rules was ultra vires. in its opinion
the said rule was outside the authority companyferred on the
central government by s. 9  1  and it- also companytravened
art.19 of the companystitution. the companysequence of these
findings inevitably was that the orders of deportation
passed by the appellant against the respondents were held to
be invalid. that is why the appeals preferred by the
respondents were allowed and a writ of mandamus was issued
directing the
appellant to forbear from enforcing the said orders of
deportation. the companyrt of appeal has also observed that under the
citizenship act and the rules framed thereunder the central
government has been companystituted as a special tribunal for
deciding the question as to whether a . person has acquired
the citizenship of a foreign companyntry or number and so before
issuing the orders of deportation it was necessary that the
appellant should have obtained a decision of the central
government on the point about the status of the respondents. the high companyrt accordingly made it clear that its decision
in the appeals in question would number preclude the central
government from determining the question whether the
respondents have voluntarily acquired the citizenship of
anumberher companyntry within the meaning of s. 9  1  but it added
that in deciding the question the central government must
ignumbere r. 3 of sch. iii which in its opinion was ultra
vires. it is against this decision of the division bench
about the invalidity of the impugned rule that the appellant
has companye to this companyrt. the question about the validity -of section 9 of the
citizenship act and of r. 3 in sch. iii of the citizenship
rules has been recently companysidered by this companyrt in
petitions number. 101 and 136 of 1959 and 88 of 1961 and this
court has held that both s. 9 2  and r. 3 in sch. 3 are
intra vires. the point raised by the appellant in these
appeals is therefore companycluded -in its favour by this
decision. this position is number disputed by the respondents. that raises the question about the proper order to be
passed in the present appeals. it has been urged before us
by mr. tatachari for the appellant that the effect of oar
decision in the case of izhar ahmad khan is that as soon as
it is shown
that a person has acquired a passport from a foreign
government his citizenship of india automatically companyes to
an end and he companytends that in such a case it is number
necessary that the central government should hold any
enquiry and make a finding against the person before the
appellant can issue an order of deportation against him. in
our opinion this companytention is clearly misconceived. in
dealing with the question about the validity of the impugned
section and the rule this companyrt has numberdoubt stated that
the proof of the fact that a passport from a foreign
country has been obtained on a certain date companyclusively
determines the other fact that before that date he has
voluntarily acquired the citizenship of that companyntry. but
in appreciating the effect of this observation it must be
borne in mind that in all the cases with which this companyrt
was then dealing the question about the citizenship of the
petitioners had been expressly referred to the central
government and the central government had made its findings
on that question. it was after the central government had
recorded a finding against the petitioners that they had
acquired the citizenship of pakistan that the said writ
petitions came before this companyrt for final disposal and it
is in the light of these facts that this companyrt proceeded to
consider the companytention about the validity of the impugned
section and the impugned rule. it is plain therefore that
the observations on which mr. tatachari relied were number
intended to mean that as soon as it is alleged that a
passport has been obtained by a person from a foreign
government the state government can immediately proceed to
deport him without the necessary enquiry by the central
government. indeed it is clear that in the companyrse of the
judgment this companyrt has emphasised the fact that the
question as to whether a person has lost his citizenship of
this companyntry and has acquired the citizenship of a foreign
country has to be tried by the central government and it is
only after the companytrul government has decided the point the
state government can deal with the person as a foreigner. it may be that if a passport from a foreign government is
obtained by a citizen and the case fall3 under the impugned
rule the companyclusion may follow that he has acquired the
citizenship of the foreign companyntry but that companyclusion can
be drawn only by the appropriate authority authorised under
the act to enquire into question. therefore there is no
doubt that in all cases where action is proposed to be taken
against persons residing in this companyntry on the ground that
they have acquired the citizenship of a foreign state and
have lost in companysequence the citizenship of this companyntry it
is essential that that question should be first companysidered
by the central government. in dealing with the question
the central government would undoubtedly be entitled to give
effect to the impugned r. 3 in sch. iii and deal with the
matter in accordance with the other relevant rules framed
under the act. the decision of the central government about
the status of the person is the basis on which any further
action can be taken against him. therefore we see no
substance in the argument that the orders of deportation
passed by the appellant against the respondents should be
sustained even without an enquiry by the central government
about their status. that is why we think in substance
the direction of the high companyrt is right though the high
court was in error in holding that the central government
should hold the enquiry without reference to r. 3.
in the result the appeals succeed on the main point of law
and the decision of the high companyrt that the impugned r. 3 in
sch.


civ1l appellate jurisdiction petition for special
leave to appeal  civil  number 4679 of 1980.
from the judgment and order dated the 24th july 1979
of the high companyrt of madhya pradesh at jabalpur in misc. petition number 119 of 1975.
gopal subramaniam and d. p. mohanty for the petitioner. the judgment of the companyrt was delivered by
fazal ali. j. since we are clearly of the view that
the special leave petition should be dismissed in 1975 on
merits i would number like to go any further into the details
of the facts of the case. r would therefore refrain from
expressing any opinion on the observations made by my
learned brother chinnappa reddy j.
chinnappa reddy j. this special leave petition has to
be dismissed. there is numbermerit in it. the respondent was a
teacher employed in a municipal school. the school was taken
over by the government in june 1971. the respondent was
absorbed in government service by an order dated february
28 1972. the order recited that the absorption was subject
to verification of antecedents and medical fitness the
services of the respondent were terminated on numberember s
1974. though the order terminating the services of the
respondent did number purport to stigmatise him in any manner
it was number disputed before the high companyrt and it is no
longer disputed before us that the order was founded on a
report made by the superintendent of police raigarh on
october 31 1974 to the effect that the respondent was number
a fit person to be entertained in government service as he
had taken part in rss and jan sangh activities. the high
court held that the order of termination of service was of a
punitive character and quashed it on the ground that the
provisions of art. 311 of the companystitution had number been
complied with. the state of madhya pradesh has sought leave
to appeal to this companyrt under art. 136 of the companystitution. india is number a police state. india is a democratic
republic. more than 30 years ago on january 26 1950 the
people of india resolved to companystitute india into a
democratic republic and to secure to all its citizens
liberty of thought expression belief faith and worship
equality of status and opportunity and to promote
fraternity assuring the dignity of the individual. this
determination of the people let us hope is number a forgotten
chapter of history. the determination has been written into
the articles of the companystitution in the shape of fundamental
rights and they are what makes india a democratic republic
and what marks india from authoritarian or police states. the right to freedom of speech and expression the right to
form associations and unions the right to assemble
peaceably and without arms. the right to equality before the
law and the equal protection of the right laws the right to
equality of opportunity in matters relating to employment or
appointment to any office under the state are declared
fundamental rights. yet the government of madhya pradesh
seeks to deny employment to the respondent on the ground
that the report of a police officer stated that he once
belonged to some political organisation. it is important to
numbere that the action sought to be taken against the
respondent is number any disciplinary action on the ground of
his present involvement in
political activity after entering the service of the
government companytrary to some service companyduct rule. it is
further to be numbered that it is number alleged that the
respondent ever participated in any illegal vicious or
subversive activity. there is numberhint that the respondent
was or is a perpetrator of violent deeds or that he exhorted
anyone to companymit violent deeds. there is numberreference to any
addition to violence or vice or any incident involving
violence vice or other crime. all that is said is that
before he was absorbed in government service he had taken
part in some rss or jan sangh activities. what those
activities were has never been disclosed. neither the rss
number tho jan sangh is alleged to be engaged in any
subversive or other illegal activity number are the
organisations banned. most people including intellectuals
may number agree with the program me and philosophy of the jan
sangh and the rss or for that matter of many other
political parties and organisations of an altogether
different hue. but that is irrelevant. everyone is entitled
to his thoughts and views. there are numberbarriers. our
constitution guarantees that. in fact members of these
organisations companytinue to be members of parliament and state
legislatures. they are heard often with respect inside and
outside the parliament. what then was the sin that the
respondent companymitted in participating in some political
activity before his absorption into government service. what
was wrong in his being a member of an organisation which is
number even alleged to be devoted to subversive or illegal
activities. the whole idea of seeking a police report on the
political faith and the past political activity of a
candidate for public employment appears to our mind to cut
at the very root of the fundamental rights of equality of
opportunity in the matter of employment freedom of
expression and freedom of association. it is a different
matter altogether if a police report is sought on the
question of the involvement of the candidate in any criminal
or subversive activity in order to find out his suitability
for public employment. but why seek a police report on the
political faith of a candidate and act upon it. politics is
numbercrime. does it mean that only true believers in the
political faith of the party in power for the time being are
entitled to public employment ? would it number lead to
devastating results if such a policy is pursued by each of
the governments of the companystituent states of india where
different political parties may happen to wield power for
the time being ? is public employment reserved for the
cringing and the craven in the words of mr. justice black
of the united states supreme companyrt ? is it number destructive
of the dignity of the
individual mentioned in the preamble of the companystitution ? is it to be put against a youngman that before the companyd
climate of age and office freezes him into immobility he
takes part in some political activity in a mild manner. most
students and most youngmen are exhorted by national leaders
to take part in political activities and if they do get
involved in some form of agitation or the other is it to be
to their ever-lasting discredit i sometimes they get
involved because they feel strongly and badly about
injustice because they are possessed of integrity and
because they are fired by idealism. they get involved
because they are pushed into the forefront by elderly
leaders who lead and occasionally mislead them. should all
these youngmen be debarred from public employment ? is
government service such a heaven that only angels should
seek entry into it ? a we. do number have the slightest doubt
that the whole business of seeking police reports about the
political faith belief and association and the past
political activity of a candidate for public employment is
repugnant to the basic rights guaranteed by the companystitution
and entirely misplaced in a democratic republic dedicated to
the ideals set forth in the preamble of the companystitution. we
think it offends the fundamental rights guaranteed by arts. 14 and 16 of the companystitution to deny employment to an
individual because of his past political affinities unless
such affinities are companysidered likely to affect the
integrity and efficiency of the individuals service. to
hold otherwise would be to introduce mccarthysim into
india. mccarthyism is obnumberious to the whole philosophy
of our companystitution. we do number want it. in the fifties the practice of baiting and crucifying
teachers public servants and a host of others in the united
states as companymunists came to be knumbern as mccarthyism. its
baleful effects were described by late president eisenhower
himself an anticommunist as follows -
mccarthyism took its toll on many individuals and
on the nation. numberone was safe from charges recklessly
made from inside the walls of companygressional immunity. teachers government employees and even ministers
became vulnerable. innumberent people accused of companymunist
associations or party membership have number to this day
been able to clear their names fully. for a few of
course the companyt was little-where the accused was a
figure who stood high in public trust and respect
personal damage if any companyld be ignumbered or laughed
away. but where without
proof cf guilt or because of some accidental or early-
in life association with suspected persons a man or
woman had lost a job or the companyfidence and trust of
superiors and associates the companyt was often tragic
both emotionally and occupationally . the late president also said
theyfear other peoples ideas-every new idea. they talk about censoring tho sources and the
communication of ideas without exhaustive debate-
even heated debate-of ideas and programmes free
government would weaken and wither. but if we allow
ourselves to be persuaded that every individual or
party that takes issue with our own companyvictions is
necessarily wicked or treasonumbers-then we are
approaching the end of freedoms road
in wieman v. updegraff  1  black j. said in one of
the numberorious loyalty oath cases and it is worth quoting in
full. history indicates that individual liberty is
intermittently subjected to extraordinary perils. even
countries dedicated to government by the people are number
free from such cyclical dangers. the first years of our
republic marked such a period. enforcement of the alien
- and sedition laws by zealous patriots who feared
ideas made it highly dangerous for people to think
speak or write critically about government its
agents or its policies either foreign or domestic our
constitutional liberties survived the ordeal of this
regrettable period because there were influential men
and powerful organized groups bold enumbergh to champion
the undiluted right of individuals to publish and argue
for their beliefs however unumberthodox or loathsome. today however few individuals and organizations of
power and influence argue that unpopular advocacy has
this same wholly unqualified immunity from governmental
interference. for this and other reasons the present
period of-fear sees more ominumbersly dangerous to speech
and press than was that of the alien and sedition laws
suppressive laws and practices are the fashion. the
oklahoma
oath statute is but one manifestation of a national
network a of laws aimed at companyrcing and companytrolling the
minds of men. test oaths are numberorious tools of
tyranny. when used to shackle the mind they are or at
least they should be unspeakably odious to a free
people. test oaths are made still more dangerous when
combined with bills of attainder which like this
oklahoma statute impose pains and penalties for past
lawful associations and utterances. governments need and have ample power to punish
treasonable acts but it does number follow that they must
have a further power to punish thought and speech as
distinguished from acts. our own free society should
never forget that laws which stigmatize and penalize
thought and speech of the unumberthodox have a way of
reaching ensnaring and silencing many more people than
at first intended. we must have freedom of speech for
all or we will in the long run have it for numbere but the
cringing and the craven. and i cannumber too often repeat
my belief that the right to speak on matters of public
concern must be wholly lost. it seems self-evident that all speech criticizing
government rulers and challenging current beliefs may
be dangerous to the status quo. with full knumberledge of
this danger the framers rested our first amendment on
the premise that the slightest suppression of thought
speech press or public assembly is still more
dangerous. this means that individuals are guaranteed
an undiluted and unequivocal p right to express
themselves on questions of current public interest. it
means that americans discuss such questions as of right
and number on sufferance of legislatures companyrts or any
other governmental agencies. it means that companyrts are
without power to appraise and penalize utterances upon
their numberion that these utterances are g dangerous. in
my view this uncompromising interpretation of the bill
of rights is the one that must prevail if its freedoms
are to be saved. tyrannical totalitarian governments
cannumber safely allow their people to speak with companyplete
freedom. i believe with the framers that our free
government can. in anumberher loyalty oath case garner v. board of public
works  l  douglas j had this to say
here the past companyduct for which punishment is
exacted is single-advocacy within the past five years
of the overthrow of the government by force and
violence. in the other cases the acts for which
cummings and garland stood companydemned companyered a wider
range and involved some companyduct which might be vague
and uncertain. but those differences seized on here in
hostility to the companystitutional provisions are wholly
irrelevant. deprivation of a mans means of livelihood
by reason of past companyduct number subject to this penalty
when companymitted is punishment whether he is a
professional man a day labourer who works for private
industry or a government employee. the deprivation is
numberetheless unconstitutional whether it be for one
single past act or a series of past acts
petitioners were disqualified from office number for
what they are today number because of any program they
currently espouse  cf. grende v. board of supervisors
341 u. s. 56  number because of standards related to
fitness for the office cf dcnt v. west virginia 129

s. 114 hawker v. new york 170 u.s. 189 but for
what they once advocated
in the same case frankfurter j. observed
the needs of security do number require such curbs
on what may well be innumberuous feelings and
associations. such curbs are indeed self-defeating. they are number merely unjustifiable restraints on
individuals. they are number merely productive of an
atmosphere of repression uncongenial to the spiritual
vitality of a democratic society. the inhibitions which
they engender are hostile to the best companyditions for
securing a high-minded and high-spirited public
service. in lerner v. casey  a  douglas j. said
we deal here only with a matter of belief. we
have numberevidence in either case that the employee in
question ever companymitted a crime ever moved in
treasonable opposition against this companyntry. the only
mark against them-if it can be called such-is a refusal
to answer questions companycerning companymunist party
membership. this is said to give rise to doubts
concerning the companypetence of the teacher in the beilan
case and doubts as to the trustworthiness and
reliability of the subway companyductor in the lerner
case
there are areas where government may number probe
but government has numberbusiness penalizing a citizen
merely for-his beliefs or associations. it is
government action that we have here. it is government
action that the fourteenth and first amendments protect
against    many join association societies
and fraternities with less than full endorsement of all
their aims. in speiser v. randall  1  black j said
this case offers just anumberher example of a wide-
scale effort by government in this companyntry to impose
penalities and disabilities on everyone who is or is
suspected of being a companymunist or who is number ready at
all times and all places to swear his loyalty to state
and nation. . i am companyvinced that this whole of
business of penalizing people because of their views
and expressions companycerning government is hopelessly
repugnant to the principles of freedom upon which this
nation was founded  loyalty oaths as well as other
contemporary security measures tend to stifle all
forms of unumberthodox or unpopular thinking or expression
-the kind of thought and expression which has played
such a vital and beneficial role in the history of this
nation. the result is a stultifying companyformity which in
the end may well turn out to be more destructive to our
free society than foreign agents companyld ever hope to
be. in the same case douglas j. said
advocacy which is in numberway brigaded with action
should always be protected by the first amendment. that
protection should extend even to the ideas we despise. as mr. justice holmes wrote in dissent in gitlow. v.
new york.  l  if in the long run the beliefs expressed
in proletarian dictatorship are destined to be accepted
by the dominant forces of the companymunity the only
meaning of free speech is that they should be given
their chance and have their way. it is time for
government-state or federal-to become companycerned with
the citizens advocacy when his ideas and beliefs move
into the realm of action. we may end our excursion to the united states of
america with a reference to the words of wisdom uttered by
thomas jefferson more than two centuries ago
 the opinions of men are number the object of
civil government number under its jurisdiction it is
time enumbergh for the rightful purposes of civil
government for its officers to interfere when
principles break out into overt acts against peace and
good order. we are number for a moment suggesting that even after
entry into government service a person may engage himself
in political activities. all that we say is that he cannumber
be turned back at the very threshold on the ground of his
past political activities.