PETITIONER: COMMISSIONER OF INCOME-TAX, BOMBAY CITY , BOMBAY Vs. RESPONDENT: <NAME> DATE OF JUDGMENT: 23/02/1962 BENCH: <NAME>, S.K. BENCH: <NAME>, S.K. KAPUR, J.L. GAJENDRAGADKAR, P.B. SARKAR, A.K. SUBBARAO, K. WANCHOO, K.N. AYYANGAR, N. RAJAGOPALA CITATION: 1963 AIR 477 1962 SCR Supl. (3) 391 CITATOR INFO : RF 1963 SC 577 (16,25) E&D 1964 SC 318 (6,8) R 1964 SC1464 (9,10,11) E 1966 SC 4 (19) R 1966 SC1514 (12) E 1968 SC 761 (6) R 1979 SC 376 (2) R 1986 SC 368 (16) RF 1992 SC 604 (92) ACT: Income-tax-Profits-Shares purchased by assessee for investment-Sales of Shares subsequently as trading activity Computation of profit. HEADNOTE: The assessee purchased shares by way of investment in 1939- 40 at a cost price which was much less than their market value on April 1, 1945. Her dividend income therefrom was assessed to income tax. In the financial year 1945-46 the assesee converted these shares into her stock-in-trade and carried on business in the shares. Per income for the assessment year 1946-47 was computed on the basis of the profits which she made by the sale of her shares as a trading activity. The assessee contended that the cost price of the shares for computing the profits was their market value at the beginning of the year when she started the trading activity, i. e., on April 1, 1945. The <ORG> contended that the cost Price of the shares was the actual price for which they were purchased by the assessee, no matter when she bought them and for what purpose. Held (per <NAME>, <NAME>, <NAME>, <NAME>, <NAME> and <NAME>, <NAME>, contra), that the profits 392 of the assessee from her business or trading activity must be computed on the basis that the market value of the shares as on April 1, 1945, was the cost price of the shares for the business. The basis must be the ordinary commercial principle on which actual profits are computed, and normally, the commercial profits out of a transaction of sale of an article are the differences, between what the article cost the business and what it fetched on sale. <CITATION> , <ORG> was considering the converse case and the principles laid down in that case were (1) that there was no general principle of taxation under income-tax law under which the <ORG> could assess a person on the basis of business profits that he might have made but had not chosen to make, and (2) that it was unreal to separate the business from its owner. Those principles have no application in the present case which is not a case of any potential future advantage; the admitted position in the present case is that there was a sale of the shares in question in pursuance of a trading or business activity and actual profits had resulted from the sale. The question here is how such commercial profits are to be calculated. In a trading or commercial sense the only fair measure of assessing such trading profits is to take the market value at one end and the actual sale proceeds at, the other. This is more in accord with reality than fiction. <CITATION> ,  S. C. R. 219, <NAME> v. <NAME> (1955) 36 T. C. 275, referred to. Per, <NAME> J.-The assessee's taxable profits on the sale of the shares earlier held as investment are the difference between the sale price and the price at which she had ac- tually bought those shares, The profits could not be compu- ted on the basis of a fictional sale by the assessee to herself on April 1, 1945. The case was governed by the principles laid down by <ORG> in <NAME>'s case. The decision of <ORG> in <NAME> v. <NAME>, which took a contrary view, was not preferable to that of <ORG> in <NAME>'s case. <CITATION> - tax (Central), Bombay, ] 1954] S. C. R. 219, followed. <NAME> v. <NAME>,  36 T.C. 2 75, not approved. JUDGMENT:

CIVIIL APPELLATE JURISDICTION : Civil Appeal No. 133 of 1958.

Appeal by special leave from the judgment and order dated March 6, 1956, of <ORG> in I. T. R. No. 49 of 1955.

<NAME>. Additional Solicitor-General of India, <NAME>, <NAME> and <NAME>, for the appellant.

<NAME>, <NAME> and <NAME>, for the respondent.

1962. February 23. The Judgment of <NAME>, <NAME>, <NAME>, <NAME>. <NAME>, <NAME> and <NAME>, <NAME>., was delivered by <NAME>, <NAME>, <NAME>, <NAME> delivered a separate judgment.

<NAME>, J.-This is an appeal by special, leave grante I by this Court on September 17, 1956. The Commissioner of Income-tax, Bombay, City 1, is the appellant before us. The respondent is <NAME>, who will be referred to in this judgment as the assessee.

The assessee is a Parsi lady who held by way of investment a large number of shares of different companies. These shares were purchased before the end of and after 1939-40 at a cost-price which was much less than their market value on April 1, 1945. Her dividend income was assessed to income- tax for several year prior to April 1, 1945 ; but in the assessment year'1946-47, the relevant accounting year being financial year 1945-46, the Incometax Officer found that the assessee had converted her shares into her stock-in-trade and carried on a trading activity, viz. a business in shares. Her income for the assessment year 1916-47 was therefore computed oil the basis of the profits which she made by the sale of her shares as a trading activity, the profits being calculated on the difference between the ruling mar:,Let price at the begining Of the account year And the sale proceeds. -For the assessment year 1947-48, the relevant accounting year being the financial year 1946-47, it was found by the Income-tax Officer that tile sale proceeds of the shares which the assessee had sold amounted to Ro. 5,49,487/. . The Income-tax Officer calculated the profits in the following manner :

Sale proceeds ... Rs. 5,49,487 Cost calculated on the basis of the market price of the shares at the beginning of the account year ... Rs. 4,50,822 ------------- ... Rs. 98,655 Less: Forward business loss ... Rs. 25,344 ------------- Net profit ... Rs. 73,321 -------------

The assessee then appealed to the Appellate Assistant Commissioner who enhanced the income of the aasessee by a sum of Rs. 2,91,307/- including a capital gain of Rs. 37,590/- The Appellate Assistant Commissioner proceeded on the footing that the profit earned by the assessee on the sale of the shares -was the difference between the original cost price of the shares and the sale proceeds. He further held that the some of the shares which were sold in the account year 1946-47 were the assessee's stock-in-trade, while some other shares were her investment shares. Then, there was an appeal to <ORG> and the principal point taken before the <ORG> related to the question as to how the profits of the assessee on the sale of her shares should be calculated. The Judicial Member of the <ORG> accepted the view expressed by the Appellate Assistant Commissioner and held that the original cost price of the shares must be taken in order to find out the profits which the assessee had made on the sale of the shares. The Accountant Member agreed, however, with the view of the Income-tax Officer and held that the market value of the shares as on the date when they 'were converted into stock-in-trade by the assessee should be taken into consideration for the purpose of ascertaining the profits made by the assessee on the sale of those shares. On this difference between the two members of the <ORG>, the matter was referred. to the President of the <ORG>. The President agreed with the view of the Accountant Member. The <ORG> was then moved by the appellant to state a case to <ORG> on the question of law which arose out of the <ORG>'s order, namely, what should be the basis of computation of the profits made by the assessee by the sale of her shares in the relevant year. The <ORG> came to the conclusion that the question as to when the assessee became a dealer in shares or when the assessee turned her investment shares into her stock-in-trade, was a question of fact, and the only question of law that arose was as to how the profit was to be computed. Accordingly, the <ORG> framed the question of law in the following terms:

"Whether the asseessee's profit on the sale of shares is the difference between the sale price and the cost price, or the difference between the sale price and the market price prevailing on 1-4-1945 ? "

The aforesaid question of law was then referred <ORG> under s. 66(1) of the Indian Income-tax Act, 1922 (XI of 1922). This was Income-tax Reference No. 49 of 1955. The reference was heard by a Division Bench consisting of <NAME>, <NAME> and <NAME>, J. By its judgment and order dated March 6, 1956, <ORG> answered the question in favour of the assessee and held that the assessee's assessable profit on the sale of shares was the difference between the sale price and the market price prevailing on April 1, 1945. The appellant having unsuccessfully moved <ORG> for a certificate under s. 66A (2) of the Income-tax Act , applied for special leave to this Court.. Such leave was granted by this court by an order dated September 17, 1956. This appeal was heard in part by a Bench of three Judges presided over by the learned Chief Justice, who directed that it be posted for hearing before a Bench consisting of'seven Judges, presumably because one of the points urged before the Bench was whether the majority , decision of this Court in <CITATION> tax (Central), Bombay(1) required reconsideration. It may 1), here started that. the learned Judges of <ORG> before them the decision in <NAME>'s case (1) and they considered that decision carefully and bold that the decision could be distinguished, firstly, on the, ground that the problem which <ORG> had before it in the present case was the content of taxable profits in a commercial sense out of the amount actually received by the assessee by a sale of her shares, whereas the problem in <NAME> case(1) was of a different nature, namely, whether it was open to the department to tax an assessee on a fictional sale or potential profits, and, secondly, on the ground that the principle laid down in <NAME>'s case had no application to a case where real or actual profits, as distinguished from fictional profits, have to be allocated or attributed to the trading activity. One of the points which we have to consider in this appeal is whether, on principle, the distinction drawn by <ORG> is correct or whether the ratio of <NAME>'s case (1) should govern the present case, As we have stated earlier, the problem is how should the profit made by the assessee by a sale of her shares as a trading activity be computed, it being not in dispute that there was in this case a real (1)  S.C.R. 219, sale resulting in actual profits. <ORG>, first emphasised the point, which has not been controverted before us, that in order to arrive at real profits one must consider the accounts of the business on commercial principles and construe profits in their normal and natural sense, a sense which no commercial man will misunderstand. It then pointed out that what the shares cost originally to the assessee at a time when she had no business or, trading activity, could not, in a commercial sense, be said to be the cost of the shares to the business which started on April 1, 1945, the original cost, was really a matter of historical record and it had no relevance in the determination or ascertainment of profits which the business made. Obviously,, the whole of the sale proceeds or receipts could not be treated as profits and made liable to tax, for that would make no sense a portion only of the receipts can be treated as profit-bat 'what portion? Normally, the commercial profits out of the transaction of a sale of in article is the difference between what the article costs the business and what it fetches on sale. <ORG> pointed out that when the assesses purchased the shares at a lesser price, that is what they cost her, and not' the business; but so. far as the business was concer- ned, the shares cost the business nothing more or less than their market value on April 1, 1945.

The learned Additional Solicitor General who' has appeared on behalf of the appellant in this case has contested the correctness of the above line of approach. He has submitted, firstly, that the distinction drawn by <ORG> between <NAME>'s case (1) and the present case is not warranted on principle: secondly, he has contended that the ratio in <NAME>'s case (1) should apply in the present case also; and thirdly, he has contended that in holding that the price of the shares should be the market price as on April 1, 1945, when the shares were converted into stook- in-trade <ORG> (1) [1954] S.C.R. 219.

In effect held by a legal fiction that the assessee had realised the potential profits on the said shares on that date which she had not actually done and Hence the very basis of the judgment of the High court is vitiated by the assumption of a fiction. The learned Additional Solicitor- General has also submitted that there was no warrant for the High court to introduce a legal fiction that there was a notional sale of the shares on April 1, 1945, by the assessee and that the gains which accrued to the assessee on that sale were capital gains; this notional sale it is submitted, violates the basic principle that a man cannot sell to himself nor can he make a loss or profit out of transactions with himself We propose now to examine these arguments in some detail. The question raised is a short question but a difficult one. In order to examine the arguements urged on behalf of the appellant, it is necessary first to refer to the decision of this Court in <NAME>'s case (1) The facts of that case were these. The assessee there was a dealer in silver and shares and he maintained his accounts according to the mercantile system and valued his stock at cost price both in the beginning and at the end of the year. During the relevant accounting year he withdrew some silver bars and shares from the business and settled them on certain trusts in which he was the managing trustee and in his books of account he credited the business with the cost price of the silver bars and shares so withdrawn. The income-tax authorities assessed him to tax on the basis of the difference between the cost price of the silver bars and shares and their market value at the date of their withdrawal from the business. <ORG> upheld the action of the income tax authorities. This Court, however, by a majority decision came to the conclusion that the assessee was entitled to value the silver bars (1) [1954] S. C. R. 219.

and shares withdrawn at cost price and was not bound to credit the business with their market value at the close of the year for ascertaining the assessable profits for the year. <NAME>, who expressed the dissentient view said that so far as the business was concerned it made no difference whether the stock-in-trade was realised or with- drawn from the business and the business was entitled to be credited with the market value of the assets withdrawn as at the date of the withdrawal, whatever be the method employed by the assessee for the valuation of its stock-in-trade on hand at the close of the year. The majority view was exp- ressed by <NAME>, J., who dealt with the two contentions of the learned Attorney General who appeared for the <ORG> (respondent) in that case. The Attorney General<NAME>s first contention was that as the silver bars and shares were brought into the business, any withdrawal of them from the business must be dealt with along ordinary and well-known business lines, namely, that if a person withdraws an asset from a business he must account for it to the business at the market rate prevailing at the date of the withdrawal. This contention was repelled by the majority on the ground that the transaction of withdrawal was not a business transaction and by the act of withdrawal the business made no profit or gain nor did it sustain a loss and the assessee derived no income from it. It was pointed out that the assessee might have stored up a future advantage for himself but as the transactions of withdrawal were not business transactions and the assessee derived no immediate pecuniary gain, the <ORG> could not tax them; for under the Income-tax Act the <ORG> has no power to tax a potential future advantage, all it can tax is income, profits and gains made in the relevant accounting year. In other words, the ratio of the decision as respects the first contention of the learned Attorney General was that there was no general principle of taxation under income-tax law under which the <ORG> could assess a person on the basis of business profits that he might have made but had not chosen to make. It was also pointed out that it was unreal and artificial to separate <NAME>the business from its owner and treat them as if they were separate en- tities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact was non existent. It was pointed out that a man could not trade with - himself nor could he make profit or loss out of transactions with himself. <NAME><NAME>. second contention of the learned Attorney General was that if the act of withdrawal was at a time when the market price wits higher than the cost price then the <ORG> was deprived of a potential profit. This contention was dismissed as unsound because, for income-tax purposes each year is a self- contained accounting period and one must take into consideration income, profits and gains made in that year and the assessing authority was not concerned with potential profits which might be made in another year. From what has been stated above it would at once appear that <NAME><NAME>s case (1) was the converse of the present case. In <NAME><NAME>s case (1) a part of the stock-in-trade was withdrawn from business, there was no sale nor any actual profit. The ratio of the decision was simply this: under the Income-tax Act the <ORG> has no power to tax a potential future advantage and all it can tax is income, profits and gains made in the relevant accounting year. In the case under our consideration the admitted position is that there has been a sale of the shares in pursuance of a trading or business activity and actual profits have resulted from the sale. The question in the present case is not whether the <ORG> has a power to tax potential future advantage, but the question is how should actual profits (1)  S. C. R. 219.

be computed when admittedly there has been a sale in the business sense and actual profits have resulted therefrom. We agree with <ORG> that in this respect there is a vital difference between the problem presented by <NAME>'s case (1) and the problem in the present case. We. further agree with the view expressed by <ORG> that the ratio in <NAME>'s case (1) need not necessarily be extended to the very different problem presented in the present case, not only because the facts are different, but because there is an appreciable difference in the principle. The. difference lies in this : in one case there is no question of any business sale or actual profits and in the other admittedly there are profits liable to tax, but the question is how the profits should be computed. We must, therefore, overrule the first two arguments of the learned Additional Solicitor General that the distinction drawn by <ORG> between <NAME>'s case (1) and the present case is not warranted on principle and that the ratio of the decision in <NAME>'s case (1) must necessarily apply to the present case also.

While we are on this question we, must refer to a decision of <ORG> in <NAME> v. <NAME> (2) to which our attention has been drawn. Briefly put, the facts of that case were these : the wife of the assessee there carried on a stud farm, the profits of which were agreed to be chargeable to income-tax under case I of Schedule D. She also carried on the activities of horse racing and training, which were agreed not to constitute trading. Five horses were transferred from the stud farm to the racing stables. The cost of breeding these horses was debited to the stud farm accounts. On the question of the amount to be credited as a receipt the assessee contended before the Special Commissioners that the proper figure to be brought in respect of the transferred horses was the cost of (1) 1 [1954] S.C.R. 219.

(2) (1955) 36 T.C. 275.

breeding. The <ORG> contended that the market value of the animals, which was considerably higher, was the proper figure. The Commissioners decided in favour of the assessee and the <ORG> demanded a case. The case was first heard by <NAME>, <NAME>, who following the decision in <ORG> (1), held that the market value of the five horses transferred from the stud farm was the proper figure that should be credited in the accounts. <NAME>, <NAME> based his decision on the ground that the case was indistinguishable in principle from an earlier decision, namely, that of <NAME>, <NAME>. in <ORG> (1). We may here state that in <ORG> (1)the assessee carried on the business of poultry breeders and dealers. In addition to keeping birds on their farm for laying purposes, they had a hatchery which produced chicks primarily for sale as 'day-old checks'. Some of these chicks were transferred to brooder houses and became part of the stock on the farm. The assessees were assessed to income-tax under schedule Din respect of the profits of the hatchery part of their business and under Schedule B in respect of the profits of the farm. The question that arose in that case was whether the day-old chicks transferred to the farm should be credited as stock at the average price at which they were sold and could have been bought in the open market, namely, 4d. per chick, and that the difference between that price and the admitted cost of production of each saleable day-old chick, 7d., was an allowable loss. The <ORG> contended that the hatchery and the farm were two activities of the same person who could not make a loss by transferring from one department to the other and therefore the chicks should be credited to the hatchery account at production cost. It was held by <NAME>, <NAME>, that in the notional sale between the hatchery and the farm, which should be treated as separate entities, the price to be credited was the "'reasonable price" laid down by s. 8 of the (1) (1942) 24 T.C. 506.

Sale of Goods Act , 1893, and that on the admitted evidence this reasonable price must be the market price of 4d. per chick. This was the decision which <ORG> followed. From the decision of <ORG> there was an appeal to <ORG>. <ORG> referred to two of its own decisions, namely, <NAME> v. <ORG> (1) and <CITATION> (2) and held that the principle stated and the reasoning underlying the judgment of Sir <NAME>, M. R. in the <CITATION> (2) were inconsistent with the conclusion in <ORG> Hornby(3). <ORG> accordingly allowed the appeal. Sir <NAME>, M.R., (as he then was) said, however, that if the matter wore res integra, he would have been inclined to hold that for the purpose of the stud farm account if one were seeking to put a value on the animals transferred the value must be that which the animals were in fact worth. He expressed the view, however., that the matter was not res integra and as a result of the authorities referred to above which expounded the general principle to be applied, he allowed the appeal. The case was then taken to <ORG>. <ORG> decided in favour of the <ORG>, Lord <NAME> dissenting. Viscount <NAME> thus expressed his views in his speech at page 299 of the report:

"But it appears to me that when it has been admitted or determined that an article forms part of the stock-in-trade of the trader, and that upon his parting with it so that it no longer forms part of his stock-in-trade some sum must appear in his trading account as having been received in respect of it, the only logical way to treat it is to regard it as having been disposed of by way of trade. If so, I see no reason for ascribing to it any (1) 22 T.C. 288.

(2) 23 T.C. 414.

(3) (1942) 24 T.C. 506.

<NAME>

other sum than that which he would normally have received for it in the due course of trade, that is to say, the market value. As I have already indicated, there seems to me, to be no justification for the only alternative that has been suggested. namely, the cost of production. The unreality of this alternative would be plain to the taxpayer. If, as well might happen, a very large service fee had been paid so that the cost of production was high and the market value did not equal it."

Lord <NAME> pointed out that when a horse was transferred from the stud farm to the owner's personal account, there was a disposition of trading stock, though the disposition might not be by way of trade. He then referred to three methods of recording the result of the disposition in the stud farm trading accounts. One of them was that there might be no entry of a receipt at all and Lord <NAME> pointed out that this method would give the self supplier an unfair tax advantage. The second method would be to enter the cost price; this again would be fictional, because, no sale in the legal sense bad taken place, nor had there been any actual receipt. The third method was to enter as a receipt a figure equivalent to the current realisable value of the stock item transferred. Lord <NAME> gave two grounds in favour of the third method. The first ground was that it gave a fairer measure of assessable trading profit as between one taxpayer and another, for it eliminated variations which were due to no other cause than any one taxpayer's decision as to what proportion of his total product he would supply to himself. The second ground was that it was better economics to credit the trading owner with current realisable value of any stock which he bad chosen to dispose of without commercial disposal than to credit him with an amount equivalent to the accumulated expenses in respect of that stock.

It is worthy of note that the facts in <NAME> v. <NAME> (1) were similar to the facts of <NAME>'s case(1). In both those cases what had happened was that a part of the stock-in-trade was withdrawn and the question was at what figure in the trading accounts the withdrawal should be accounted for. In <NAME>'s case (2) this Court came to the conclusion that the withdrawal should be at the cost price. In <NAME> v. <NAME> (1) <ORG> hold that the proper figure should be the market value which give a fairer measure of assessable trading profit. It is significant that <ORG> reached that conclusion not without dissent. If the facts of the case which we are now considering were similar to the facts of <NAME>'s case (2), it might have been necessary for us to reexamine the, ratio of the decision. It is necessary to state here, however, that the decision of <ORG> in <NAME> v. <NAME> (1) is an authority which is binding on us. It is only an authority of persuasive value entitled to great respect.

In an earlier part of this judgment we have taken pains to point out the distinction between <NAME>'s case (2) and the case under our consideration. In view of that distinction, we do not think that it is really necessary in the present case to reexamine the ratio of the decision in <NAME>'s case (3). What then is the basis for computing the actual profits in the present case ? We think that the basis must be, as <ORG> has put it, the ordinary commercial principles on which actual profits are computed. We think that the approach of <ORG> was correct and normally the commercial profits out of the transaction of sale of an article must be the difference between what the cost the business and what it fetched on sale. So far as the business or trading activity was concerned, the market value of the shares as on April 1, (1) [1955] 36 T.C. 275.

(2) [1954] S.C.R. 219.

1945, was what it costs the business. We do not think that there is any question of a notional sale here. <ORG> did not create any legal fiction of a sale when it took the market value as on April 1, 1945 as the proper figure for determining the actual profits made by the assessee. That the assessee later sold the shares in pursuance of a trading activity was not in dispute; that sale was an actual sale and not a notional sale ; that actual sale resulted in some profits. The problem is how should those profits be computed ? To adopt the language of Lord <NAME>, the only fair measure of assessing trading profits in such circumstances is to take the market value at one end and the actual sale proceeds at the other, the difference between the two being the profit or loss as the case may be. In a trading or commercial sense this seems to us to accord more with reality than with fiction. For these reasons we hold that the answer given by <ORG> to the question of law referred to it was correct. The appeal accordingly fails and is dismissed with costs. <NAME>, J.-Two questions arise in this Appeal. The first is whether the judgment of the <ORG>, below is against the decision of this <ORG> in <CITATION> .(1) The second is, if so, does the decision in <NAME>'s case(1) require reconsideration ? It appears that in <NAME> v. Wernher(1) where the question was the same as in <NAME>'s case(1) and which was decided a little later than that case, <ORG> took a view contrary to that taken in <NAME>'s case. It was on the basis of the reasoning on which <NAME>'s case (2) was founded that the learned advocate for the respondent contended that <NAME>'s case requires reconsideration. The assessee in the present case is a lady of (1)  S.C.R. 219;  23 1. T. R. 506. (2)  A.C. 58 ; 36 T.C. 275.

some means. For many year past she had been holding various shares by way of investment on the dividends of which she was being charmed to income-tax. In assessing the tax for the assessment year 1946-47, the accounting period of which was the financial year 1945-46, it was found that the assessee had been carrying on business with some of the said shares since April, 1945. It is not in dispute that in the accounting year 1946-47 also, which is the year with which we are concerned, she carried on the business with various such shares.

A question arose in connection with the assessment of tax for 1946-47 as to how the profits of her trading activities were to be ascertained. The trade was one of purchase and sale of shares. It is common ground that the profits of such a trade are the difference between what the thing sold fetched and what it cost to acquire. The question arose because difficulty was felt in fixing tile cost of acquisition. In regard to shares acquired by the assessee for her trade after she started it, the position was not in controversy, for the cost in respect of such shares was admittedly what he bought them for. The controversy concerned the shares with which she traded in this year and which, prior to April. 1, 1945, she had been holding as investment, having acquired them, it may be, quite a few years ago. The assessee contended that the cost of acquisition of this latter variety of shares-and with these alone we are concerned in this appeal, was their market value on the date when she started her business and thereby converted them from investment into stock-in-trade, of her business. The <ORG> contended that the cost of acquisition of these shares would be what she bought them for, no matter When she bought them and for what purpose. The <ORG> accepted by a majority the, contention of the assessee. At the instance of the <ORG> the <ORG> then referred the following question to <ORG> at Bombay under s.66(1) of the Income-tax Act :

"Whether the assessee's assessable profits on the sale of shares is the difference between the sale price and the cost price, or the difference between the sale price and the market price prevailing on 1-4-1945."

<ORG> held that the assessable profits were the difference between the sale price and the market value of the shares prevailing on April 1, 1945. The <ORG> has filed this appeal against the decision of <ORG>. The <ORG> contends that <ORG>'s decision is the judgment of this <ORG> in <NAME>'s case.(1). That is the first question which I propose to discuss. The assessee in <NAME>'s case was a dealer in shares and silver. The method employed by him in keeping his accounts was to enter the cost price of his stock at the beginning, of the year, to credit the sale proceeds of the stock' sold during the year and value the unsold stock at the end of the year at cost price, these latter being carried forward as the opening entries of the next year's accounts. It appeared that the assessee had withdrawn some silver and shares from his business and settled these upon certain trusts. In the accounts he entered the silver and shares so withdrawn at their cost price. The <ORG> contended that these should have been entered in the accounts at their market value on the date they were withdrawn from the business. This <ORG> found this contention unacceptable and held that the entry should be of the cost price and not of the market value on that date.

It had been contended on behalf of the <ORG> that "As this is a business, any withdrawal of the assets is a business matter and this only feasible way of regarding it in a business light is to enter (1) (1954) S.C.R. 219; [1957] 23 T.T.R. 506.

<NAME>

the market price at the date of the withdrawal," and that "if- a person withdraws an asset from a business he must account for it to the business at the market rate prevailing at the date of the withdrawal." In dealing with these contentions this <ORG> observed, " It is impossible to (yet away from the fact that the business is owned and run by the assessee himself. In such circumstances we are of opinion that it is unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by-means of a fictional sale introduce a fictional profit which in truth and in fact is nonexistent. Cat away the fictions and you reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the fact of it is not only absurd but against all canons of mercantile and income-tax law."

The decision in <NAME>'s case (1) was however by a majority, <NAME> having taken a contrary view. For the purpose of the present question I will have to confine myself to the judgment of the majority.

It seems to me that the argument of the respondent in the present case is the same as that of the Attorney-General in <NAME>'s case. She says that she is entitled to debit the accounts of her business with the market value of the shares as on the date of their conversion into stock-in-trade, that is, April 1, 1945. She can no doubt do that if she had acquired then on that date, from 'the market. But this she did not do. So she is compelled to rely on a fictional purchase by her from herself at the market rate of that date to sustain her contention. <NAME>'s case definitely held that no one can be supposed to be trading, with himself for the purpose of ascertaining taxable profits. A fiction therefore that one has done so is not permissible. To hold that the assesses is entitled to enter in the (1) [1954] S.C.R. 219 ; [1957] 23 I.T.R. 506.

accounts of her business, the market value of the shares on April 1, 1945, would be to go directly against the decision in <NAME>'s case and the ratio on which it was based. It was said that <NAME>'s case dealt with a fictional sale and potential or notional profits whereas in the present case there was actual trading in the shares and the problem here is to ascertain the profits of that trade. I am not sure that the distinction so sought to be made is really possible. Both the cases dealt with the assessment of the profits of an entire trading activity of a person. There were real profits in both cases and the question in each was, how to assess them. The difficulty in one case arose because a particular stock acquired for the trade had been withdrawn from it and in the other, because a particular stock not acquired for the trade had been used for its purposes. The question in each case was, what value was to be put on the stock concerned for assessing the profits of the trade as a whole. It would be incorrect to split up the entire trade and to treat the deal in each stock separately and I do not think <NAME>'s case (1) did so. So considered the state would have no basis for any claim in <NAME>'s case for then there would have been no business at all to tax. It was therefore that in <NAME>'s case the State contended that the stock had been "'brought into the business" and on that basis only could it advance by argument. It was this argument advanced on that basis that this Court considered and rejected, The Court did Dot consider the profits of a particular item of trade by itself. So the Court did not consider notional profits in the sense indicated by the distinction now sought to be made between the two cases, The present case is the same, for here also the question is what are the profits of the assessee's entire trade, that is, how is the cost price to be calculated for (1) [1954] S.C.R.219;[1957]23 I.T.R.506.

that purpose ? Here also, if the sale of the investment sharer by themselves was concerned there would in all probability have been no trading and no question of assessing the profits of such trading would have arisen Therefore, both cases dealt with the assessment of actual profits ; none was concerned with assessment of notional profits.

But suppose the two cases are different as suggested, that doe,; not seem to me to make any distinction., In <NAME>'s case (1) it had been held that the withdrawal was not trading because a 'man could not trade with himself. In the present case the assessee did no doubt trade by selling her shares to a stranger. There was no fiction in this trade. But when the assessee contends that in ascertaining the profits of a trading transaction actually lone by her she should be permitted to value the stock involved in that trading activity which she had not acquired in the course of her trade at the market value of the date of the commencement of that trade She really says that she should be allowed to proceed on the basis of a fiction that she had purchased from herself on that date for she had not then purchased it at all. She would be asking us to hold that which <NAME>'s case refused to hold. I, amenable to agree that in the case of a real sale <NAME>'s case does not forbid a dichotomy between the owner of a business and the. business itself for ascertaining the profits of that sale as the assessee wants us to do.

It was also said that to apply the principle that one cannot trade with himself to the present case would be overlooking the actual fact that money's worth was brought into the business. I am unable to appreciate this contention. There is no overlooking of the money's worth brought in, for (1)[1954] S. C. R. 219; [1957] 2 3 1. T. R. 506, that money's worth is value at the cost at which the stock concerned was actually acquired from the market, may be as an investment and not as a stock in trade. I am unable to appreciate how it can be said that any money's worth would be over looked which, I Will assume, no business in will do in calculating his profits if the shares are not valued at the market value of the day on which they are brought into the trade but are valued at the price it which actually they had been previously acquired by the assessee. The real question is what were the shares' worth in money for calculating the profits. The contention of the respondent assumes that the money's worth must be calculated as on the date of the commencement of the trade and hence really begs the question.

<NAME>, <NAME> who delivered the judgment of <ORG>, said that he did not understand <NAME>'s case (1) to mean that even for the purpose of accountancy or for the purpose of ascertaining commercial profits it is not open to the court to value the shares at the market pi-ice of the date on which they were brought into the business. I am enable to agree. Accountancy, I suppose, is not based on fiction but deals with realities. We are concerned with accountancy only for the purpose of ascertaining commercial profits, and it was only for that purpose that this Court held that you cannot enter in your accounts the market value of 'goods on the fictional basis that you sold them to yourself. <NAME>, <NAME>, thought that <NAME>'s case was not dealing with commercial profits. I think that since that case was considering profits for income-tax purposes it was not dealing with anything else. I am also unable to agree with the view of <NAME>, <NAME>, that the ratio in the decision of <NAME>'s case has no application to the present case. The ratio was that for the purpose of ascertaining taxable profits it is not possible to conceive of one trading (1) [1954]S.C.R.219.[1957]23 I.T.R.506.

with himself and it would apply here, for here also taxable profits are being ascertained.

<NAME>, <NAME> observed that what has to be ascertained is what an article costs the business and not the owner, but in <NAME>'s case (1) it was expressly said that when the business is owned by the assessee himself it is unreal to separate the business from its owner and treat them as if they were different entities trading with each other. <NAME>, <NAME> also said that for Income-tax purposes profits of a business have to be understood in a way that a man of business would understand it. I am not aware that a commercial man must compute profits on the basis of a fiction that he has bought from himself and cannot compute his profits by deducting from the sale proceeds the price for which he had actually acquired the goods. <NAME>'s case said that you cannot asses,% taxable profits on the basis of a fictional sale. If you cannot do that, neither do I think can you assess such profits on the basis of a fictional purchase in the market. And that is what the assessee wants us to do. I am for myself entirely unable to make any distinction between <NAME>'s case and the present case.

I have now to refer to <NAME>'s case (2) and examine whether on the reasoning on which it was based it is necessary to reconsider <NAME>'s case. That is the second question which arises in this case. 1 do not find the reasoning of that case so strong as to lead me to the opinion that the decision in <NAME>'s case was wrong. I first note that one of the learned Judges Lord <NAME>, took the same view as was taken by this Court in <NAME>'s case. In dealing with <NAME>'s case I will be referring to the judgment of the majority.

(1) [1954] S.C.R. 219, [1957] 23 I.T.R. 506. (2) [1956] A.C. 58 36 ; T.C. 2 75.

Now, <NAME>'s case (1) also dealt with the withdrawal of assets from a taxable business, There a lady owned two enterprises, one, a stud farm the income of which was liable to tax and another a racing establishment, which was recreational and therefore not liable to tax. The lady transferred some horses from the stud farm to the racing establishment. In assessing the income of the stud farm a question arose as to what value should be put in its accounts for the horses transferred to the racing establishment. It will be noticed that by the transfer to the racing establishment of which she was the owner, the lady had only withdrawn the horses from her taxable undertaking. The problem there was therefore just the same as in <NAME>'s Case(2).

It was held by <ORG> that the value to be put on the horses withdrawn from the stud farm was their market value at the date of the transfer and not the cost incurred on them for breeding and otherwise till the transfer. <ORG> observed that in Income-tax Law a dichotomy between the owner of a business and the business is possible and presumably therefore trading between the,two could be conceived for tax purposes in certain cases and referred to some English authorities in support of this view. I will assume that such a dichotomy is possible in some cases but the question is whether it is possible in a case like <NAME>'s case. On that question I do not find <ORG> giving any special reason to make that dichotomy. I also note that <ORG> did not dispute that as a general rule the dichotomy cannot be made. Apart from the general observation mentioned above <ORG> based its decision on two grounds. What <ORG> thought strongly supported its view first that since it was conceded before them that some entry had to be made (1)[1956] A.C. 58; 36 T.C. 275.

(2) [1954] S.C.R. 219; [1957] 23 I.T.R. 506.

in respect of the horses withdrawn, and that whether the entry was of the cost incurred for breeding the horses transferred or of their market value on the date, of the transfer, the entry would in either case be fictional for they were not in fact transferred at any of those prices and therefore it was more real to enter the market value. Now, as Lord <NAME> himself noted, the entry of the cost price would really be canceling the entry of the cost in breeding the horses which had been made in the accounts of the farms. He however found no explanation why cancellation should take place. I think it be legitimately said that there is an explanation and as was said in <NAME>'s case, that is that the bad to take place because assets were withdrawn from the trade, unless entries were made canceling the cost of items of stock brought into the trade when they were taken out of the trade, the accounts would not give the real picture of the profits of the actual trade. A second reason which appears only in the judgment of Lord <NAME> is that if the market value of the date of withdrawal is not entered, there will be an inequitable distribution of the burden of tax. This is not very clear to rule. Learned advocate for the assessee said that Lord <NAME> was contemplating the case of two traders who started their business on the same day one of whom bought his stock in trade from the market on that date, of course at the market value, and the other started his business by converting what he was earlier holding for his personal purpose, into stock-in-trade. It was said that unless the latter was permitted to value his stock in trade at the market rate on the date of conversion, he would be subjected to a tax different in amount from that of the tax on the former and this would result in inequitable distribution of the burden of taxation. Again I am not convinced that this reasoning is conclusive. Take the case of two traders. One by his shrewd business method or by friendly contacts, or may be by means not very creditable may on the same day acquire goods necessary for his trade at a much cheaper rate, than the other. The profits of the two would then be different. I do not imagine that any income- tax law would find this objectionable. Furthermore, I am not sure that this anxiety for an equitable distribution of the burden of tax justifies departure from a cardinal rule which is accepted in many cases in England also, that a man cannot be said to trade with himself so as to make taxable profits.

Lord <NAME> realised the difficulty of the problem which he had to solve and said so. I do not think I will be wrong in saying that he put his decision on the ground of the best practical solution of that difficulty. The majority judgment in <NAME>'s case does not lead me to the conclusion that our decision in <NAME> case (1) was wrong. I respectfully prefer the view taken in <NAME>'s case and by Lord <NAME> in <NAME>'s case"). <NAME>, J. in his minority judgment in <NAME>'s case based himself on the arguments-of the Attorney General. It is not necessary to specifically deal with his views for they have been dealt with in that case and with what have been said there I am in complete agreement.

Before leaving <NAME>'s case it would be of some interest to point out that Lord <NAME> did not think that any distinction was possible between the case that he had before him and a case like the one now before us for he said: "And so also, as I have more than once pointed out in this case, it is conceded by the tax-payer that some figure must appear in the stud farm accounts as receipt in respect of the transferred horses, though Lady <NAME> in her capacity as transferee did not carry on a taxable activity, In the same way, it would, I suppose, be claimed that, if Lady <NAME> were to transfer or retransfer a horse from her racing establishment to her (1) [1954] S.C.R. 219.

(2) [1956] A.C. 58 ; 36 T.C. 275.

stud farm some figure would have to appear in the stud farm accounts in respect of that horse though it cost her nothing to make the transfer- If it were not so and she subsequently sold the transferred horse and the proceeds of sale were treated as receipts of the stud farm, she could justly complain that she had been charged with a fictitious profit."

In the course of arguments a case was suggested of a man who had inherited or received by way of gift, a certain commodity with which after a lapse of some time he started a trade. It was said that it would be impossible in such a case to say that the cost of acquisition of his stock-in- trade was nil and the entire sale proceeds received by him in respect of that thing in his trade were his profits. Now, it seems to me that even if it were so, it would not follow that his stock-in-trade had to be valued at the date on which he started his trade with that. So to hold would be against <NAME>'s case(1). That being so, this illustration would only beg the question and not prove that <NAME>'s case is wrong. I think a businessman would in such a case enter into his accounts as the price for which he acquired his stocking trade its value in the market on the date on which he received it free. That would not involve going against <NAME>'s case, for it would not be based on a fictional trading by a man with himself. If you cannot distinguish a business from its proprietor, then the cost of a thing for the purpose of the business would be its value at the time the proprietor of the business acquired it. Such value from a businessman's point of view would in my opinion be the value for which he acquired it when he did .go for value, or its market value on the date of acquisition, when he paid no value for it.

I would therefore allow this appeal and answer the question framed by the <ORG> by 'saying (1)[1954] S.C.R. 219.

that the assessee's Taxable profits on the sale of the shares earlier held as investment are the difference between the sale price and the cost price, that is, the price at which she had actually bought those shares. By <ORG> : In accordance with the opinion of the majority, this appeal is dismissed with costs.

Appeal dismissed.


PETITIONER: <NAME> Vs. RESPONDENT: THE STATE OF ORISSA. DATE OF JUDGMENT: 07/04/1954 BENCH: <NAME>, VIVIAN BENCH: <NAME>, VIVIAN MAHAJAN, <NAME> (CJ) <NAME>, <NAME> CITATION: 1954 AIR 359 1955 SCR 92 CITATOR INFO : A 1955 SC 41 (11) R 1959 SC 707 (5) R 1961 SC1381 (10) F 1977 SC 786 (9,12,14) ACT: Prevention of Corruption Act , 1947 (II of 1947) Section 5(1)(2) ,(3) and section 6- - sanction under section 6 --Whether necessary to be in any particular form-No particulars given in the charge or sanction-Legal effect thereof. HEADNOTE: Held, that it is not necessary for the sanction for an offence punishable under section 5(2) of the Prevention of Corruption Act, 1947 (Act II of 1947) to be in any Particular form or in writing or for it to set out the facts in respect of which it is given. It is, however, desirable to state the facts on the face of sanction, because when the facts are not set out in the sanction, proof has to be given aliunde that sanction was given in respect of the facts constituting the offence charged but an omission to set out the facts in the sanction is not fatal so long as the facts can be and are proved in some other way. Where the sanction was confined to section 5(2) of the Act, it could not, under the circumstances of the case, have related to anything but clause (a) of sub-section (1) of section 5 and therefore an omission to mention clause (a) in the sanction did not invalidate it. under section 5(3) of the Act all that the prosecution has to do is to show that the accused or some person on his behalf is in possession of pecuniary resources or property disproportionate to his known sources of income and for which the accused cannot satisfactorily account. Once that is established then the <ORG> is bound to presume unless the contrary is proved, that the accused is guilty of the new offence created by section 5 namely criminal misconduct in the discharge of his official duty. Held, also that there was no illegality either in the sanction or in the charge on the ground that no particulars were given because the offence under section 5(1)(a) of the Prevention of Corruption Act does not consist of individual acts of bribe taking as in section 161 I.P. C. but is of a general character and individual instances are not necessary because of the presumption which section 5(3) requires the <ORG> to draw. <CITATION> (A.I.R. 1948 P.C. 82) referred to. JUDGMENT:

CRlMlNAL APPELLATE JURISDICTION: Criminal Appeal No. 33 of 1952.

Appeal under Article 134(1)(c) from the Judgment and Order dated the 19th February, 1952, of <ORG> at Cuttack in Criminal Appeal No. 66 of 1950 arising out of the Judgment and Order dated the 19th September, 1950, of <ORG>, Cuttack-Dhenkanal, Cuttack, in Sessions Trial No. 9-C of 1950.

<NAME>, <NAME> and <NAME>, for the appellant.

<NAME>, for the respondent.

1954. April 7. The Judgment of the Court was delivered by <NAME> -The appellant was an Inspector of Factories under the Government of Orissa. 'It was a part of his duty to inspect factories and mills in the State of Orissa. He toured the districts of Koraput and Balasore from 18th August, 1948, to 27th August, 1948, and from 29th September, 1948, to 30th October, 1948, respectively. The prosecution case is that he collected bribes from persons connected with some of the mills he inspected in those districts. It is said that he used to threaten to close their mills and impose other penalties for alleged defects unless they paid him a bribe.

On 3rd October, 1948, he was camping at the Dak Bungalow at Basta in the Balasore district. Because of information received against him his person and belongings were searched on that day and a sum of Rs. 3,148 was recovered from him consisting of Rs. 450 paid at the time as a trap and Rs. 2,698 already in his possession. He was arrested on the spot but was later released on bail.

Departmental and other proceedings were taken against him and he was eventually brought to trial on 29th March, 1950, and charged under section 5(2) of the Prevention of Corruption Act (II of 1947) for criminal misconduct in the shape of habitually accepting illegal gratification. He was also separately charged and separately prosecuted under section 161 of the Indian Penal Code for three specific offences of bribe taking but we are not concerned here with that as he was acquitted on all three counts. His, conviction here is under section 5(2) alone. <ORG> sentenced him to rigorous imprisonment for four years and a fine of Rs. 5,000. <ORG> upheld the conviction on appeal but reduced the sentence to two years and a fine of Rs. 3,000.

The accused applied for a certificate to appeal under article 134(1)(c) on three points. <ORG> held that two of them were not of sufficient importance to justify the issue of a certificate-particullarly as one of the two was covered by the principle laid down by this Court. But it granted leave on all three as it considered that the first point was of importance. The points were formulated as follows:

"(i) whether the view of this Court as to the requirement of sanction in a case of this kind and the interpretation of <NAME>'s case in A.I.R. 1948 P.C. p. 82 adopted by this Court in its judgment are correct;

(ii)whether the interpretation of this Court relating to the requirements as to the corroboration of an accomplice witness in a bribery case with reference to the latest unreported case of <ORG> which has been referred to in the judgment and which has since been reported in 1952 S.C.J. p. 46 is correct;

and

(iii)whether the law as propounded by the decision now' sought to be appealed against with reference to the considerations that arise in judging the presumptions under section 5(3) of the Prevention of Corruption Act is correct."

The first point arises in this way. Four kinds of criminal misconduct are set out in section 5 of the Prevention of Corruption Act. They are enumerated in clauses (a), (b),

(c) and (d) of sub-section (1). The sanction is general and does not specify which of these four offences was, meant. It runs as follows:

" Government of Orissa.

<ORG>.

Order No. 4561/Com., dated 3-11-1948.

In pursuance of section 6 of the Prevention of Corruption Act, 1947 (II of 1947), the Governor of Orissa is hereby pleased to accord sanction for prosecution of <NAME>, Inspector of <ORG> Orissa, employed in connection with the affairs of the Province under sub-section (2) of section 5 of the said Act.

2. Nature of offence committed:

Criminal misconduct in discharge of official duty.

By order of the governor, <NAME>, Secretary to <ORG>. It was contended that <ORG> held in <CITATION> (1) that such a sanction is invalid. <ORG> rejected this argument. We agree with <ORG>.

The passage of the <ORG> judgment on which reliance is placed is as follows "In their Lordships' view, in order to comply with the provisions of clause 23 it must be proved that the sanction was given in respect of the facts constituting the offence charged. It is plainly desirable that the facts should be' referred to on th; face of the sanction but this is not essential since clause 23 does not require the sanction to be in an particular form nor even to be in writing. But if the facts constituting the offence charged are not known on the face of the sanction, the prosecution must prove by extraneous evidence that those facts were placed before the sanctioning authority."

The Judgment of the Judicial Committee relates to clause 23 of the Cotton Cloth and Yarn (Control). Order, 1943, but the principles apply here. It is no more necessary for the sanction under the Prevention of Corruption Act to be in any particular form, or in writing or for it to set out the facts in respect of which it is given than it was under clause 23 of the Order which their Lordships were considering. The desirability of such a course is obvious because when the facts are not set out in the sanction proof has to be given (1) A.I.R. 1948 P.C. 82.

aliunde that sanction was given in respect of the facts constituting the offence charged, but an omission to do so is not fatal so long as the facts can be, and are, proved in some other way.

<ORG> finds that the facts to which the sanction relates were duly placed before the proper sanctioning authority. We need not consider the evidence about telephone calls and the like because the letter of the District Magistrate asking for sanction (Exhibit 26) is enough to show the facts on which the sanction is based. 'It is in these terms:

"I have the honour to report that <NAME>, Inspector of Factories, Orissa, in the course of his visit to this district had been -visiting certain mills, and on information received by me that he had been collecting heavy sums as illegal gratification from the Manager or Proprietor of Mills under threat of mischief to the mill owners, it was arranged to verify the truth of this information by handing over 3 hundred rupee notes marked with my initials in presence of the Superintendent of Police and two other respectable gentlemen and millowners, on the evening of the 2nd October, 1948. On the 3rd October the Factory Inspector having actually received the illegal gratification of Rs. 45o which sum included the three marked hundred rupee notes, the Prosecuting Inspector seized the marked notes along with a further heavy sum of Rs. 2,698 from his possession. Under section 6 of the Prevention of Corruption Act, 1947, the accused being a public servant in the employ of <ORG> the sanction of <ORG> is necessary prior to taking cognisance of an offence under section 161 , Indian Penal Code or subsection (2) of section 5 of the Act."

A sanction based on the facts set out in this letter,. namely the information received about the collection of heavy sums as bribes and the finding of Rs. 2,698 in his possession would be sufficient to validate the present prosecution. It is evident from this letter and from the other evidence that the facts placed before the Government could only relate to offences under section 161 of the Indian Penal Code and clause (a) of section 5(1) of the Prevention of Corruption Act. They could not relate to clauses (b) or (c). Therefore, when the sanction was confined to section 5 (2) it could not, in the circumstances of the case, have related to anything but clause (a) of sub- section (1) of section 5 . Therefore, the omission to mention clause (a) in the sanction does not invalidate it. The present prosecution is confined to section 5(1)(a) which runs as follows:

"(1) A public servant is said to commit the offence of criminal misconduct in the discharge of his duty(a) if he habitually accepts or obtains or agrees to accept or attempts to obtain from any person for himself or for any other person, any gratification (other than legal remuneration) as a motive or reward such as is mentioned in section 161 of the Indian Penal Code."

Then comes sub-section (3) which sets out a new rule of evidence in these terms:

"In any trial of an offence punishable under subsection (2) the fact that the accused person or any other person on his behalf is in possession, for which the accused person cannot satisfactorily account, of pecuniary resources or property disproportionate to his known sources of income may be proved, and on such proof the <ORG> shall presume, unless the contrary is proved, that the accused person is guilty of criminal misconduct in the discharge of his official duty and his conviction therefor shall not be invalid by reason only that it is based solely on such presumption." Therefore, all that the prosecution has to do is to show that the accused, or some person on his behalf, is in possession of pecuniary resources or property disproportionate to his known sources of income and for which the accused cannot satisfactorily account. Once that is established then the <ORG> has to presume, unless the contrary is proved, that the accused is guilty of the new offence created by section 5 , namely criminal misconduct in the discharge of his official duty.

Now the accused was found in possession of Rs. 3,148. He accounted for Rs. 450 of that sum by showing that it was paid to him at the time as a trap. He has been acquitted of that offence, so all he had to account for was the balance Rs. 2,698. This is a large sum for a touring officer to carry with him in cash while on tour. His explanation was not considered satisfactory and that is a question of fact with which we are not concerned in this Court. Therefore, all that remains to be seen is whether this was disproportionate to his known sources of income. The accused is a Government Factory Inspector and we were told that his salary is only Rs. 450 a month. <ORG> finds that the total sums drawn by him during his entire period of service of thirteen months was Rs. 6,045 as salary and Rs. 2,155 as travelling allowance. It also finds that he owns 0.648 acres of land which brings in no income worth the name. On the expenditure side of the accused's account <ORG> finds that he has a substantial family establishment which would not leave him enough margin for saving such a large sum of money. No other source of income has been disclosed. It is evident that no touring officer of his status and in his position would require such a large sum of money for his touring purposes even if he was away from headquarters for a month. His explanation was considered unsatisfactory by both Courts and was disbelieved. These are all questions of fact. Once the facts set out above were found to exist and the explanation of the accused rejected as unsatisfactory, section 5(3) was at once attracted and the Court was bound to presume (the word used in the section is "shall" and not "may") that the accused was guilty under section 5(2) , especially as this part of the section goes on to say-

"and his conviction therefor shall not be invalid by reason only that it is based solely on such presumption." These facts alone are enough to sustain the conviction and we need not consider the other matters. <ORG> was right in holding that the sanction was sufficient and in convicting the accused.

The third point set out in the certificate of <ORG> relates to the absence of particulars in the charge and, we gathered from the arguments, in the sanction. But no particulars need be set out in the charge in such a case because the offence under section 5(1)(a) does not consist of individual acts of bribe taking as in section 161 of the Indian Penal Code but is of a general character. Individual instances may be useful to prove the general averment in particular cases but it is by no means necessary because of the presumption which section 5(3) requires the <ORG> to draw. There was therefore no illegality either in the sanction or in the charge; nor has the accused been prejudiced because he knew everything that was being urged against him and led evidence to refute the facts on which the prosecution relied. He was also questioned about the material facts set out above in his examination under section 342 of the Criminal Procedure Code and was given a chance then as well to give such explanation as he wished. The appeal fails and is dismissed.

Appeal dismissed.


PETITIONER: STATE OF PUNJAB AND ANR. Vs. RESPONDENT: IQBAL SINGH DATE OF JUDGMENT12/02/1976 BENCH: SINGH, JASWANT BENCH: SINGH, JASWANT GUPTA, A.C. CITATION: 1976 AIR 667 1976 SCR (3) 360 1976 SCC (2) 1 CITATOR INFO : R 1983 SC 130 (20) R 1984 SC1064 (18) F 1985 SC1196 (7) R 1987 SC 943 (8) ACT: Punjab Civil Service Rules-r. 6.4-Retired <ORG> servant-Pension and death-cum-retirement gratuity reduced by <ORG> on the ground that service record not satisfactory-Pension if a bounty paid by <ORG>- If property under Arts 31(1) and 19(1)(f) of the Constitution- If reasonable opportunity of making defence should be given before reducing the pension. Constitution of India-Att. 311(2)-Applicability of. HEADNOTE: Purporting to act under r. 6.4 of the Punjab Civil Service Rules. the <ORG> imposed a cut of 5 per cent on the pension and death-cum-retirement gratuity of the respondent. who was a retired <ORG> servant, on the ground that his service record was not satisfactory. <ORG> allowed the respondent's writ petition challenging the decision of the <ORG>. Dismissing the appeal of the <ORG>. ^ HELD: The ground that superannuation pension is a bounty and is given as an act of grace is not available to the appellant. In <NAME> v. The <ORG> of Bihar, [1971] Supp. S.C.R. 634, it was held by this Court (1) that pension is not a bounty payable on the sweet will and pleasure of the <ORG> and the right of a <ORG> servant to receive it is property under Art. 31 ( 1 ) of the Constitution. and so the <ORG> cannot withhold the same by a mere executive order: and (2) the claim to pension is property under Art. 19 (1) (f) of the Constitution and is not saved by cl. (5) of Art. 19. [362C-D] (2) Though the impugned order imposing the cut in pension and gratuity is not one of reduction in rank falling within the purview of Art. 311(2 ), yet there can be no doubt that it adversely affected the respondent and such an order could not have been passed without giving him a reasonable opportunity of making his defence. [362G] <CITATION> [19731 2 S.C.R. 405, applied. (3) <CITATION>  1 S.C.R. 981, is inapplicable to this case because the point as to whether an opportunity to show cause was to be afforded to a retired <ORG> servant before applying the cut in his pension in view of the principle of natural justice of audi alteram partem was never urged or gone into in that case, nor was the question whether pension was a bounty or property arose in that case. [364 D-E] JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1203 of 1968.

From the order dated the 4-4-1967 of <ORG> in L.P.A. No. 104 of 1967.

<NAME>, for the appellant.

<NAME> and <NAME>, for the respondent. The Judgment of the Court was delivered by <NAME>, J.-This appeal by certificate of fitness granted by <ORG> is directed against the judgment dated April 4, 1967 of <ORG> of that Court passed in Letters Patent Appeal No. 104 of 1967 whereby the judgment and order dated December 19, 1966 of Narula, J. (as he then was) in Civil Writ Petition No 298 of 1966 was affirmed.

It appears that the respondent joined <ORG> by direct recruitment as senior lecturer in 1933. He was promoted to <ORG> (Class l) on October 1, 1949. He was given the selection grade with effect from February 15, 1956 and in due course rose to the position of Director of Public Instruction-cum-Secretary to <ORG>, <ORG>. He proceeded on leave preparatory to retirement on March 18, 1958, on attaining the age of super- annuation. In June; 1961, he received a copy of letter No. 5137-ED-I-60/9269 dated May 2, 1961 addressed by the Secretary to <ORG>, Punjab, <ORG> to the Director of Public Instruction, Punjab, Chandigarh, conveying the sanction of the Governor of Punjab to the grant to him i.e. the respondent of superannuation pension and death-cun1-retirement gratuity of Rs. 417.02 np. per mensem and Rs. 17,030.25 np in lump sum respectively under rules 5.27 and 6.13 of the Punjab Civil Service Rules, Vol. II read with para 9(1) (a) of the New Pension Rules, 1951. It was stated in the aforesaid letter that personal file of the respondent had been examined with reference to rule 6.4 of the Punjab Civil Service Rules, Vol. II and <ORG> were satisfied that his service record was not satisfactory and a cut of 10% had accordingly been made in the amount of pension and death-cum-retirement gratuity admissible to his. On January, 28, 1962, the respondent submitted representations to the Chief Minister and Governor of Punjab against the aforesaid decision of the <ORG> to apply 10% cut in his pension and death-cum-retirenment gratuity but the same proved abortive. After the establishment of the Board set up to examine and remove the grievances in the matters of promotion and fixation of pension etc. Of the Gazetted officers of the <ORG>, the respondent addressed a representation to the said Board on September 14, 1964, against the. aforesaid decision of the <ORG> to apply a cut of l0% in his pension and gratuity. On November l . 1965, the respondent received a copy of letter No. EDI-4(64)-65/22436 dated October 21, 1965, addressed by the Education Commissioner and Secretary to <ORG>, Punjab, <ORG>, to the Director of Public Instruction, Punjab, intimating that in supersession of the aforesaid letter dated May 2, 1961 of the Punjab <ORG>, it had been decided to grant to the respondent a superannuation pension and death-cum-retirement gratuity of Rs. 440.18 np per mensem and Rs. 18,927.50 np in lump sum respectively under rules 5.27 and 6.13 of the Punjab Civil Service Rules, Vol. II read with para 9(i) (a) of the New Pension Rules, 1951. In para 3 of the letter, it was reiterated that a cut of 5% had been made in the pension admissible to the respondent as his service record which had been examined with reference to rule 6.4 of the Punjab Civil Service Rules, Vol. II had not been satisfactory. Aggrieved by this communication, the respondent filed in <ORG> at Chandigarh a petition under Articles 226 and 227 of the Constitution, being Civil Writ Petition No. 298 of 1966, challenging the aforesaid decision of the Punjab <ORG> which was, as already stated, allowed by <NAME>, J. r(as he then was) by his judgment and order dated December 19, 1966, following the Full Bench Judgment of his Court dated October 25,1966,in Civil Writ Petition No. 504 of 1954 entitled <NAME>, Retired. Superintending Engineer, 45, <ORG>, Simla v. . The State of Punjab(l). Dissatisfied with this judgment and order, the appellants preferred a Letters Patent Appeal, being L. P. A. No. 104 of 1967 which did not meet with success. Thereupon the appellants applied for a certificate under Article 133 of the Constitution which was granted to them. This is how the matter is before us.

Although in the grounds of appeal, it has been urged by the appeIlants that the <ORG> decision of <ORG> in <NAME> case (supra) is not in accordance with law as superannuation pension is a bounty and is given only as an act of grace, that ground is no longer available to the appellants in view of the decision of this <ORG> in <NAME> v. The state of Bihar & Ors. (2) where it was held that pension is not a bounty payable on the sweet will and pleasure of the Government and the right of a Government servant to receive it is property under Article 31(1) of the Constitution and the <ORG> cannot withhold the same by a mere executive order. It was further held in that case that the claim to pension was also property under Article 19(1) (f) of the Constitution and was not saved by clause (S) thereof. The learned counsel appearing for the appellants has, however, made a feeble attempt to urge that no opportunity to show cause was required to be given to the respondent before passing the order imposing the cut in his superannuation pension and death-cum-retirement gratuity under clauses (a) and (b) of rule 6.4 of the Punjab Civil Service Rules (Pension Rules), as the order was an administrative order and the case did not fall within the purview of Article 311 (2) of the Constitution. It has been further contended by learned counsel for the appellants that it was the judgment of this <ORG> in <CITATION> (8), and not the judgment in <CITATION> (4) which governed the present case. We regret we are unable to accede to these contentions.

Though the impugned order imposing cut in pension and gratuity is not one of reduction in rank falling within the purview of Article 311 (2) yet there can be no doubt that it adversely affected the respondent and such an order could not have been passed without giving him a reasonable opportunity of making his defence. Reference r in this connection may be made with advantage to the decision of this Court in <NAME> case (supra) where after an exhaustive review of the case law bearing on the point, it was observed at page 413 as follows:- -

"Where a body or authority is judicial or where it has to determine a matter involving rights judicially because of express or implied provision, the principle of natural justice audi alteram partem applies. See: <CITATION> . [1950 S.C.R. 621 (725), and <ORG>, U.P.

(1) I.L.R. (1917) Punjab & Haryana 278. (2) [1971] Supp. S.C.R. 634.

(3) [1960] I S.C.R. 981: A.I.R. 1960 S.C. 247. (4) [1973] 2 S.C.R. 405.

ALLahabad v. <NAME> & ors. (1962) Suppl. A (3) S.C.R. 36.] With the profiteration of administrative decisions in the welfare state it is now further recognised by Courts both in England and in this country, (especially after the decision of <ORG> in <NAME> v. <NAME> (1964) A.C. 40 that where a body or authority is characteristically administrative the principle of natural justice is also liable to be invoked if the decision of that body or authority affects, individual rights or interests, and having regard to the particular situation it would be unfair for the-body or authority not to have allowed a reasonable opportunity to be heard.. See: <ORG> of orissa v. Dr. (Miss) Binapani Dei & Ors. [1967) 2 S.C.R. 625 and In re H. K. (An lnfant) [1967] 2 Q.B.D. 617. In the former case it was observed as follows:- C "An order by the <ORG> to the prejudice of a person in derogation of his vested rights may be made only in accordance with the basic rules of justice and fairplay. The deciding authority, it is true, is not in the position of a Judge called upon to decide an action between contesting parties, and strict compliance with the forms of judicial procedure may not be insisted upon. He is however under a duty to give the person against whom an enquiry is held an opportunity to set up`his version or drefence and an opportunity to correct or to controvert any evidence in the possession of the authority which is sought to be relied upon to his prejudice. For that purpose the person against whom an enquiry is held must be informed of the case he is called upon to meet and the evidence in support thereof. The rule that a party to whose prejudice an order is intended to be passed is entitled to a hearing applied alike to judicial tribunals and bodies of persons invested with authority to adjudicate upon matters involving civil consequences. It is one of the fundamental rules of our constitutional set up that every citizen is protected against exercise of arbitrary authority by the <ORG> or its officers. Duty to act judicially would therefore arise from the very nature of the function intended to be performed. It need not be shown to be super-added. If there is power to decide and determine to the prejudice of a person, duty to act judicially is implicit in the exercise of such power. If the essentials of justice be ignored and an order to the prejudice of a person is made, the order is a nullity. That is a basic concept of the rule of law and importance thereof transcends the significance of a decision in any particular case."

These observations were made with reference to an authority which could be described as characteristically administrative. At page 630 it was observed:

"It is true that the order is administrative in character, but even an administrative order which involves civil consequences as already stated, must be made consistently with the rules of natural justice after informing the first respondent of the case of the <ORG>, the evidenve in support thereof and after giving an opportunity to the first respondent of being heard and meeting or explaining the evidence."

"This case and the English case in re H.K. (An Infant) were spcifically referred to with approval in a decision of the constitutional bench of this Court in <NAME> & Ors. etc. v. <ORG> [1970] l S.C.R. 457".

The decision of this <ORG> in <NAME> case (supra) on which strong reliance has been placed on behalf of the appellants is of no assistance to them as the point as to whether an opportunity to show cause was to be afforded to a Government servant before applying a cut in his pension in view of the principle of natural justice embodied in the well known maxim audi alteram partem was never urged or gone into in that case. Furthemore as pointed out by <NAME>, J. while speaking for the <ORG> in <NAME> <NAME>'s case (supra) the question whether pension is a bounty or property did not arise in the former case. The present case is, in our , opinion, fully covered by the judgment of this <ORG> in <NAME> Sobha Rai Mehta's case (supra).

For the foregoing reasons we are of the view that the impugned judgments do not suffer from any illegality and were rightly rendered. In the result the appeal fails and is hereby dismissed with costs.

P.B.R. Appeal dismissed.


JUDGMENT <NAME>, J.

1. This is an application to revise an order made by the learned District <NAME> of Tenali by which he -allowed a petition presented on behalf of the second respondent here that she may also be impleaded as a party to a suit O.S. No. 66 of 1935. The application was presented under Order 1, Rule 10 of the Code of Civil Procedure. The relevant portion of the rule is worded as follows:

The <ORG> may at any stage of the proceedings, either upon or without the application of either party, and on such terms as may appear to the <ORG> to be just, order... that the name of any person who ought to have been joined, whether as plaintiff or defendant, or whose presence before the <ORG> may be necessary in order to enable the <ORG> effectually, and completely to adjudicate upon and settle all the questions involved in the suit, be added.

2. It is obvious from this provision that the <ORG> in making an order directing a new party to be added must be satisfied either that that party ought to have been joined as plaintiff or defendant or that the presence of that party is necessary to enable the <ORG> effectually and completely to adjudicate upon and settle all the questions involved in the suit. From the order of the learned District Munsif it appears that at the hearing of the application, the <NAME> for the plaintiffs was absent and only the first plaintiff was present in person to represent his objections. The learned District Munsif says that the first plaintiff was unable to explain what detriment would be suffered by him if the petition was granted. Then he says that he sees no detriment that would be caused to the plaintiff if the second respondent here were brought on record as the second defendant. He also says that he does not see how it widens the scope of the suit or changes the character of it. From these statements contained in the order it is clear that the learned District Munsif did not apply his mind to the essential requisites prescribed by Order 1, Rule 10 and therefore it became necessary for the learned Advocates for the parties to address lengthy arguments before me in support of their respective contentions.

3. The suit was filed by three plaintiffs and the main reliefs asked for in the plaint were the following:

(1) to declare the plaintiffs' hereditary right to perform archaka service in <ORG> situated in the village of Nidubrolu;

(2) to remove the defendant from the position of archaka and to declare that the defendant has absolutely no right to the archaka service;

(3) to remove the defendant from possession of the house mentioned as item 2 in the schedule to the plaint and to put the plaintiffs in possession thereof;

(4) to direct the defendant to give the plaintiffs the property mentioned in item 3 of the schedule to the plaint or its value; and (5) to grant a permanent injunction restraining the defendant from interfering in future with the plaintiffs' enjoyment of the rights to perform archaka service.

4. The following geneological table is necessary to understand the plaintiffs' case as disclosed in the plaint.

<NAME> - died in 1921. (died) 1st plaintiff. | | Daughter (died). | __________________________________________________________ | | | Daughter Daughter- Daughter petitioner (died). 3rd plaintiff before <ORG> married 2nd who has been directed plaintiff by <ORG> to be impleaded as 2nd defendant.

5. The plaint allegations are to the effect that the hereditary right to the archaka service in the temple was vested in the ancestors of <NAME> and <NAME> who were both the brothers of the first plaintiff that these two brothers are now dead but that during their lifetime they were both of them performing the archaka service personally each of them doing duty alternately for six months at a time in the year and that as remuneration for such service they were enjoying separately in 'two shares the archaka service inam lands. The first plaintiff's case according to the plaint is that on the death of <NAME> his right to enjoy the one-half of the archaka service inam lands and his right to perform archaka service for a period of six months in the year devolved on the first plaintiff. The case of the second and third plaintiffs according to the plaint is that on the death of <NAME> whose daughter the third plaintiff is, the corresponding rights which vested in <NAME> devolved on the third plaintiff and her husband the second plaintiff. How the third plaintiff's husband, the second plaintiff became entitled to this right is not explained in the plaint. The plaint goes on to say that the second plaintiff's father <NAME> was in actual management of the right mentioned above on behalf of the plaintiffs and while he was in such management he had appointed the defendant as a temporary clerk for performing the archaka service and had put him in possession of the house mentioned in Schedule B to the plaint on the distinct understanding that he should relinquish archaka service and deliver possession of the house whenever he was called upon to do so. Subsequently an arrangement was made between the first plaintiff ;on the one hand and the second and third plaintiffs on the other according to which the latter were to perform the archaka service alternately for six months at a time in the year and the first period of the six months ended on the 30th of June, 1933. Thereupon the first plaintiff caused the second and third plaintiffs to send a registered notice to the defendant informing him that the first plaintiff's right to perform the service for six months commenced on the 1st of July, 1933 and that since the plaintiffs had decided to perform the service themselves the defendant should relinquish such service and deliver possession of the house and other perquisites that were given to him during the time that he was called upon to perform such service. To that notice the defendant replied stating that he was appointed archaka not on behalf of the plaintiffs but by the trustees of the temple appointed under <ORG>.

6. The first defendant in his written statement alleged inter alia that the first plaintiff was not entitled to any relief in respect of the temple because he had been given away in adoption to another family as a result of which he had lost all his rights in his natural family and that on the death of <NAME>, his rights devolved on his two daughters, namely, the third plaintiff and her sister the respondent who has now on her application been directed by the Court below to be impleaded as second defendant. Thus the first defendant's version was that neither the first plaintiff nor the second plaintiff had any interest whatsoever in the archaka service or in the service inam lands but that the right involved in the suit was vested in the third plaintiff and her sister, the second respondent to this application. The first defendant also asked in his written statement for further particulars as to how the right that was vested in <NAME> devolved upon the third plaintiff and her husband the second plaintiff and stated that on such particulars being furnished he would plead further. It was after this written statement was filed that the second respondent who as already stated is the sister of the third plaintiff came forward with her application to be impleaded as a party to the suit. Her version in the petition filed by her was that during the minority of herself and the third plaintiff their uncle <NAME> who is also the father-in-law of the third plaintiff was invested with the right of managing the temple and the service inam lands and also performing the archaka service on behalf of the two sisters. Her case therefore was that she was entitled to one-half of the suit properties, that she had an equal joint interest with the third plaintiff in the suit property and that consequently she was a necessary party to the suit. This application was resisted before <ORG> on behalf of the three plaintiffs who contended that in case the petition was allowed and the respondent was impleaded as a party, it would lead to a triangular fight about title and that the effect of including her as a party would be to convert the suit which was one in ejectment into a suit based on title. They also pleaded that the right of the present respondent if any to the temple lands had become barred by limitation. These are the main contentions that are urged before me on behalf of the petitioners by their learned Advocate Mr. <NAME>. He relies on the English decisions reported in <NAME> v. <NAME> (1892) 1 Ch. 487 and also on the decision of a single Judge of this Court reported in <CITATION> for Hindu Religious Endowments, Madras (1926) 51 M.L.J. 148 : I.L.R. 50 Mad. 34. There are other reported cases relied on by him in support of his contention that the second respondent should not have been impleaded as a party to the suit and those are the decisions reported in <CITATION> (1934) 68 M.L.J. 236, <CITATION> (1938) 41 Bom. L.R. 249 at 256, <CITATION> A.I.R. 1929 Mad. 443 and <NAME> v. Alt Miahe (1923) 28 C.W.N. 805.

7. The learned Advocate for the respondent on the other hand contends that the subject-matter of the suit concerns the newly added party and that the suit is not a simple suit in ejectment but that it is a suit for a declaration that the three plaintiffs are solely entitled to a hereditary right to perform archaka service in the temple and to enjoy the service inam lands. He contends that as a joint interest in those rights is claimed by the second respondent her presence as a party to the suit is necessary to avoid multiplicity of suits. In support of his contentions he relies mainly upon the decision in <CITATION> (1881) I.L.R. 5 Mad. 52 which has been followed by <NAME>, J., in the decision reported in <CITATION> A.I.R. 1929 Mad. 443. He also relies upon the decision in Montgomery v. Foy, Morgan and Co. (1895) 2 Q.B. 321, <CITATION> A.I.R. 1935 Mad. 353, <CITATION> (1937) 1 M.L.J. 597 and <CITATION> A.I.R. 1929 Mad. 403 (1). I am satisfied that the contentions of the learned Advocate for the respondents are well founded in view of the main relief asked for by the three plaintiffs in their plaint. This, in my view, is a case in which the presence of the second defendant-respondent before <ORG> is necessary within the meaning of Order 1, Rule 10 of the Civil Procedure Code to enable the <ORG> effectually and completely to adjudicate upon and settle all the questions involved in the suit. By avoiding to implead her as a party to the suit the plaintiffs are seeking to obtain a relief which will not completely dispose of all the matters in controversy involved in the suit.

8. The learned Judges who decided the case reported in <CITATION> (1881) I.L.R. 5 Mad. 52 were Sir Charles Turner, C.J. and <NAME>, J. The decision turned on the scope of Section 32 of the Code of Civil Procedure of 1877. Under that section also the Court had the power of directing a person to be made a party:

Whose presence before the <ORG> may be necessary to enable the <ORG> effectually and completely to adjudicate upon and settle all the questions involved in the suit.

9. These are the words that occur in Order 1, Rule 10(2) of the present Code also. Dealing with these words the learned Judges say as follows:

Is it meant by these words that a person not originally impleaded is to be made a party only if the questions raised in the suit cannot otherwise be completely and effectually determined between the parties to the suit? or is it meant completely and effectually determined so that they shall not be again raised in that or in any other suit between the parties to the suit or any of them and third parties? To accept the more restricted interpretation involves the addition of words which we do not find in the section, namely, 'between the parties to the suit....

10. This seems to me to be a complete and effective answer to a similar argument addressed in the present case by the learned Advocate for the petitioner. Following the decisions reported in <CITATION> (1881) I.L.R. 5 Mad. 52 and <CITATION> A.I.R. 1929 Mad. 443, I therefore hold that the learned District Munsif acted correctly in allowing the petition of the second respondent to be impleaded as a party to the suit. This Civil Revision Petition is in the circumstances dismissed wiih costs. The order staying the trial before the Court below is cancelled.