PETITIONER: COMMISSIONER OF INCOME-TAX, <NAME> Vs. RESPONDENT: <NAME> DATE OF JUDGMENT: 25/10/1965 BENCH: <NAME>, K. BENCH: <NAME>, K. SHAH, J.C. SIKRI, S.M. CITATION: 1966 AIR 1260 1966 SCR (2) 296 CITATOR INFO : R 1972 SC 202 (3,4,11) RF 1975 SC 838 (2) ACT: Income-tax Act  s. 8 proviso 3-Scope of. Part B States (Taxation Concessions) Order, 1950-Effect of. Indian State-Status under International Law. HEADNOTE: In respect of the assessments made on the Nizam of Hyderabad for the assessment years 1950-51 and 1951-52 the following questions arose in <ORG> in a reference under s. 66(1) of the Income-tax Act 1922 : (i) Whether having regard to the Covenant dated 25th January 1950 entered into by the assessee with <ORG> at the time of merger of the State of Hyderabad with the Dominion of India the assessee was not liable to tax under the Income-tax Act ; (ii) whether under International law, the assessee was immune from taxation in respect of the assessment ear 1950-51; (iii) Whether having regard to the provisions of Part B States (Taxation Concession) order 1950 the assessee's income was totally 'exempt from tax; (iv) whether the interest received by the assessee in respect of certain income-tax free loans issued by <ORG> was exempt from tax; and (v) whether the income payable to the assessee under two trusts-the Family Trust and the Miscel- laneous Trust-arising from Government securities settled by the assesses on the trusts, was exempt from payment of tax. <ORG> answered some of the questions in favour of the assessee and others against him. The Commissioner of Income-tax and the assessee appealed to this Court. HELD : (i) The privileges guaranteed by the relevant articles of the merger agreement were only personal privileges of the assessee as an Ex Ruler, and those privileges did not justify his claim to immunity from taxation. [300 <CITATION> ,  1 S.C.R. 779, followed. (ii) Hyderabad State never acquired international personality under the International Law and so its ruler could not rely upon International law for claiming immunity from taxation of his personal properties. From 1858, Hyderabad was under the suzerainty of the British <ORG> till the. Indian Independence Act of 1947 was passed, and thereafter, after negotiations it acceded to the Indian Dominion. It was never recognised as an international personality by the family of nations. <ORG>, therefore, erred in holding that the income received by the assessee up to 26th January 1950, was not liable to tax under the Income-tax Act [302 E; 303 B; 304 F-G; 305 B] Further, the assessee's right to exemption if any, under International Law, during the accounting year, was irrelevant to the question of taxation under the Act. Under the Act , an individual is assessed to income tax on the income of the previous year at the rate or rates fixed for the year by the annual Finance Act . If during the assessment yew an individual is assessable to tax, the fact that during the previous year 2 97 he was not liable to tax at all because there was no income tax in the area to which the Act was extended, or because, under an income-tax Act in force therein during that year his income was exempted from tax, or because, of any other law including international law he was so exempt from tax, would not be of any relevance. After the extension of the Indian Income-tax Act to the Hyderabad State the charge was under the Act and not under the provisions of the previous law. Thereafter, the charge as well as the manner of computation of income did not depend upon the preexisting law, but only upon the provisions of the Act. After 26th January 1950, the assessee ceased to be a ruling Chief and he was, therefore, liable to assessment under the Act. If he was assessable to tax, the statutory charge on his income during the previous year was only traceable to the Act, which was retroactive in operation to that extent. [307 F-H; 308 A-C] (iii) The assessee was not entitled to any exemptions under the Part B State (Taxation Concessions) Order, 1950. [309 G] If the assessee was not liable to pay tax under the State law, his non-liability related only to the domain of exemption. It would be incongruous to say that a person exempted from taxation was paying a nil rate and on that basis contend that no tax was payable by him. The Order was only intended to provide a machinery for scaling down the rates of tax in relation to the rates prevailing in the Part B State. If there was a State law prescribing rates, it would afford the criterion for scaling down the Indian rate of tax; if there was no State law prescribing the rate the schedule of rates annexed to the Order would govern the taxation. [309 E-G] (iv) The assessee was entitled to exemption from tax both under s. 8 , proviso (3) of the Income-tax Act , as well as under item 8 of the Notification dated 21st March 1922. [309 H; 311 F] In the case of the income from securities s. 8 applies, and under the 3rd proviso thereto the, income-tax payable on the interest receivable on any security of <ORG> issued income-tax free shall be payable by <ORG> and no tax on interest on such securities was payable by the assessee. The, proviso does not use the ex- pression "Government securities" but only mentions "securities of a State Government". Under cls. 58 and 60 of s. 3 of the General Clauses Act , 1897, the expression "State Government" takes in the Government of Hyderabad State. If so, in terms of the proviso, the income tax payable on the interest receivable on the securities of <ORG>, issued income-tax free, shall be payable by <ORG> and the assessee was not liable. Also, as the assessee held the securities as his private property, under the Notification, the exemption applied both for income-tax and super-tax [310 C, G; 311 B-D, F] (v) In regard to the interest receivable by the assessee from the securities and loans of the two trusts, he was not liable to pay income-tax, but he was not exempt from payment of super-tax under item 8 of the Notification dated 21st March 1922. [313 H] The question had to be decided on a construction of s. 41 of the Act. But it is only after ascertaining the income and after giving exemptions, that s. 41 of the Act comes into play, and the income-tax authority ha.-. the option under s. 41 , to assess the beneficiary directly or, in respect of the same income, the trustee on behalf of the beneficiary. Under s. 8 proviso (3) the assessee would not be liable to pay income-tax on the interest from the income-tax free securities. Since the interest on securities in the hands of the trustees does not become an income 298 other than such interest in the hands of the beneficiary, it retains its character as such interest whether the assess- ment is made on the trustee or the beneficiary. Therefore the assessee would not be liable to pay income-tax, but his liability to pay super-tax is not transferred by the proviso to <ORG>. Nor could the assessee claim the benefit of the Notification for an exemption with respect to super-tax, because, under the trust deeds the Government loans ceased to be the private property of the assessee and after the ,execution of the trust deeds they were held by the trustees not on behalf of the assessee as his private property but for the purpose of discharging the obligations imposed on them under the trust deeds. [312 G; 313 E, F G, 314 A; 315 A-D] JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 46-49 of 1964.

Appeals by special leave from the judgment and order dated July 4, 1961 of <ORG> in Case Referred No. 35 of 1959.

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

<NAME>, <NAME>, <NAME>,<NAME> and <NAME>, for the respondent. The Judgment of the <ORG> was delivered by <NAME>, J. These four appeals by special leave granted this <ORG> are preferred against the judgment of a Division Bench ,of the Andhra Pradesh High <ORG> at Hyderabad in a case referred to it by <ORG>, Hyderabad Bench, under s. 66(1) of the Indian Income-tax Act, 1922, hereinafter ,called the Act, in respect of assessments made on H.E.H. the Nizam of Hyderabad for the assessment years 1950-51 and 195152.

The Income-tax Officer, <NAME>, Hyderabad-Deccan, by his ,orders dated February 15, 1955, and March 31, 1956, rejected the ,objections raised by the assessee and assessed him to income-tax for the said two years. Against the said orders the assessee filed two appeals before the Appellate Assistant Commissioner, Hyderabad, who, by his orders gave some relief in respect of the said assessments. On further appeals by the assessee, <ORG>, Hyderabad Branch, allowed the appeals of the assessee in part and ordered the assessments to be revised accordingly. At the instance of the assessee, <ORG> drew up a statement of case and referred four questions to <ORG> for its decision. On July 4, 1961, <ORG> answered some of the questions in favour of the assesses and others against him. The Commis-

sioner of Income-tax filed two appeals to this Court, being Civil Appeals Nos. 46 and 47 of 1964, insofar as <ORG> judgment went against the <ORG>; and the assessee filed two appeals, being Civil Appeals Nos. 48 and 49 of 1964 against that part of <ORG> judgment which rejected his contentions.

To avoid prolixity and repetition we shall state the relevant facts in considering each of the questions referred, to <ORG>.

Questions 1 and 3 may be considered together. The said questions read Question 1. "Whether in the circumstances of the case and having regard to International Law and construction of Municipal Laws and/or the covenant dated 25-1-1950 between the Assessee and <ORG>, the Assessee was liable to tax under the Indian Income-tax Act , 1922, in respect of any part of his income."

Question 3. "Whether, in any event, the Assessee enjoyed immunity from taxation under the Indian Income-tax Act , 1922, in respect of income which accrued or arose to him or was received by him up to 26th January 1950."

These two questions raise the following points : (1) Whether under International Law the assessee is immune from taxation in respect of the assessment year 1950-51; and (2) whether, having regard to the said Covenant dated January 25, 1950, he was not liable to, tax under the Indian Income-tax Act , 1922. <ORG> held that under the International Law, the assessee being a sovereign up to January 25, 1950, his income up to that date was immune from taxation and that, the Indian Income-tax Act not having expressly amended the International Law in its application, to India, his income till that date was not liable to tax under the, Income-tax Act . As a corollary from the said conclusion, <ORG> held that as the assessee ceased to be a sovereign from January 26, 1950, the income accrued to him thereafter was liable to tax. <ORG> rejected the contention of the assessee that he was exempted from the liability to pay income-tax under the Covenant entered into by him with <ORG> at the time of merger. The argument based upon the Covenant may easily be disposed of. The relevant articles of the Covenant read as follows Article 3. His Exalted Highness the Nizam of Hyderabad and the members of his family shall be en-

titled to all the personal privileges, dignities and titles enjoyed by them whether within or outside the territories of the Dominion before the 15th August 1947.

Article 4. <ORG> guarantees the succession according to the laws and customs of the Gaddi of the State and the personal rights, privileges, dignities and titles of His Exalted Highness the Nizam of Hyderabad.

The argument was that the assessee's immunity from taxation as a sovereign was a privilege guaranteed to him under the said articles of the covenant. This question need not detain us, as it was answered by this Court in <CITATION> (1) in the context of the claim of exemption from agricultural income-tax by an Ex-Ruler of an Indian State based upon articles in a merger agreement, similar to the one now in question. This Court held that the privileges guaranteed by the relevant articles of merger agreement were only personal privileges of the appellant as an Ex-Ruler and that those privileges did not justify his claim to immunity from taxation. Following this decision we reject the contention of the assessee based upon the said articles of the Covenant.

Now, we shall take the first question, excluding that part of it which refers to the said Covenant, and question 3. Mr. <NAME>, learned counsel for the <ORG>, contended that under the International Law a foreign sovereign ,was not immune from taxation in respect of his private properties :situated in the taxing State; even if there was such an immunity under the International Law, the assessee, being under the suzerainty or the paramountcy of the British <ORG>, had never enjoyed the status of a sovereign as understood in the International Law and, therefore, not governed by that law; and that, in any event, as on January 26, 1950, the date when he became liable to tax, he was no longer a sovereign and therefore he could not claim exemption under the International Law. Mr. <NAME>, learned counsel appearing for the assessee, while conceding that the assessee could not claim exemption under International Law in respect of the assessment for the year 195152, argued that he was not liable to income-tax for the assessment year 1950-51 on the ground that under the Indian Income-tax Act , income-tax was charged on the assessee's income received ,during the accounting year and that as during the accounting year (1)  1 S.C.R. 779.

30 1 the assessee was a ruling chief, he was exempt from taxation under the International Law. He argued that under the International Law, as understood by English Courts, a foreign sovereign was exempt from taxation, that the said interpretation of the law had become the common law of England and that the said common law was the law of India before the Constitution and it continued to have force thereafter by reason of Art. 372.

The validity of Mr. <NAME>'s contention depends upon our acceptance of four premises, namely (i) the English Courts have finally accepted the view that under International Law a sovereign is immune from taxation in respect of his private property; (ii) that it had become a part of the common law of England; (iii) that before the Indian Constitution came into force, the said common law was accepted and applied by <ORG>; and (iv) that the said common law so accepted as the common law of this country continued to be in force by reason of Art. 372 of the Constitution.

International Law vis-a-vis the liability of a sovereign to taxation in respect of his private property is in a process of evolution. It has not yet become crystallized. It is true that some of the textbooks on the subject and some of the decisions support the view that sovereign rulers are exempt from taxation : see Halsbury's Laws of England, 3rd Edn., Vol. 20, p. 589; Oppenheim's International Law, 8th Edn., Vol. 1, D. 759. But, even in England <ORG> in <NAME> v. <NAME>) observed :

"Their Lordships do not consider that there has been finally established in England.................... any absolute rule that a foreign independent sovereign cannot be impleaded in our courts in any circumstances."

Interesting and instructive discussion on the question of a foreign sovereign's immunity from taxation in respect of his private properties is found in the American Journal of International Law, Vol. 46, at p. 239, under the heading "Immunity from Taxation of Foreign State-owned property". After an elaborate consideration of the relevant material on the subject, the learned author concludes thus, at p. 258 :

"Immunity from taxation should be the rule when the activities concerned are those normally and traditionally regarded as governmental in character; but when a foreign state engages in trading operations of a (1) L.R. [1952] A.C. 318,343.

type generally open to private persons there seems no need to better its competitive position or to shift tax burdens to others through giving it exemption from taxes." In dealing with taxation of property, the learned author says, at p. 256, thus "The use of these agreements, combined with the practice discussed above, appears to be bringing about a situation in which it will become generally recognized that International Law provides for the tax exemption of foreign state-owned property used for functions generally accepted as public." "It is by no means clear, however, that the same result is either probable or desirable when we are dealing with property used for purposes which seem more commercial than governmental."

It may also be noticed that in India there is no absolute prohibition against a ruler of a foreign state being sued in India: see ss. 86 and 87 of the Code of Civil Procedure. He can be sued with the consent of <ORG>. It is not necessary in this case to decide this question, as we are satisfied that <NAME> had never acquired international personality under International Law. We have noticed the aforesaid facts only to indicate that the question is not free from difficulty and that it requires serious consideration when it directly arises for decision. We shall, therefore, assume for the purpose of these appeals that a foreign sovereign who has acquired an international personality has such an immunity from taxation. We shall now proceed to consider the question why in our view <NAME> had never acquired international per- sonality. As a learned author puts it.

"Every civilised <ORG> which is a member of the family of nations is an International person. Recognition of a <ORG> as a, member of the family of nations involves recognition of such <ORG>'s (1) equality, (2) dignity, (3) independence, and (4) territorial and personal supremacy."

According to <NAME>, all the said qualities constitute, as a body, the international personality of a State. Unless the State of Hyderabad had the said qualities, its ruler could not claim any of the immunities sanctioned by International Law. A brief his-

3 0 3 tory of the status of the Hyderabad State vis-a-vis the British Crown would help us to ascertain its status in International Law.

In 1858 <ORG> took over from the East India Com- pany the administration of the entire territory of India. Thereafter, while the British India was under the direct rule of the <ORG>, the Indian States remained under the personal rule of their Chiefs under the suzerainty of the <ORG>. In the Pronouncement of Lord Canning he clearly stated The <ORG> in England stands forth the unquestioned ruler and paramount power in all India."

This concept of suzerainty by the <ORG> was also described a& "Paramountcy". The relationship between the paramount power and the Indian <ORG>s was described in the "White Paper on Indian <ORG>s", at p. 32, thus "As already stated the paramountcy of the British <ORG> was not co-extensive with the rights of the <ORG> flowing from the Treaties. It was based on Treaties, Engagements, Sanads as supplemented by usage and sufferance and by decisions of the Government of India and the Secretary of <ORG> embodied in political practice."

The said White Paper further discloses that while the States were responsible for their own internal administration, the <ORG> accepted responsibility for their external relations and defence. The Indian States had no international status, and for external purposes, they were practically in the same position as British India. The Government of India Act, 1935, gave the Indian States an option to join the federation subject to certain conditions; but that part of the said Act was abandoned in 1939. The Indian Independence Act of 1947 introduced a change in the relationship between the <ORG> and the said States. Section 7 (1) (b) of the Indian Independence Act of 1 947, reads :

"As from the appointed day the suzerainty of His Majesty over the Indian States lapses, and with it, all treaties and agreements in force at the date of the passing of this Act between His Majesty and the rulers of Indian States, all functions exercisable by His Majasty at that date with respect to Indian States, all obligations of His Majesty existing at that date towards Indian States or the rulers thereof, and all powers, rights, authority, or jurisdiction exercisable by His Majesty at up CI/65-6 that date in or in relation to Indian States by treaty, grant, usage, sufferance or otherwise; and Provided that notwithstanding anything in paragraph (b)........ of this sub-section, effect shall, as nearly as may be, continue to be given to the provisions of any such agreement as is therein referred to which relate to customs, transit and communications, posts and telegraphs, or other like matters, until the provisions in question are denounced by the Ruler of the Indian States........ on the one hand, or by the Dominion or Province or other part thereof concerned on the other hand, or are superseded by subsequent agreements.

Though under this Act the paramountcy of the <ORG> lapsed in regard to Hyderabad and other States, the preexisting agree- ments with those States continued in respect of specified matters. The lapse of suzerainty or the breaking of ties with the British <ORG> did not ipso facto raise their status to that of international personality. It created a void and the position of the States was in a fluid state. No de facto or de jure recognition was given to the Hyderabad State or to any other State by the family of nations. But, after protracted negotiations, the <ORG> issued a proclamation on November 23, 1949, accepting the Constitution of India, shortly to be adopted, subject to ratification by the constituent assembly of the Hyderabad State. The said constituent assembly ratified it and thereafter the Hyderabad State was included in Part B of the First Schedule to the Constitution : see Appendix LIV, White Paper on Indian States (N.S. 6), p. 369, and <NAME>'s Commentary on the Constitution of India, 4th Edn., Vol. 4, pp. 32-34. It will be seen from the said history that Hyderabad was under the suzerainty of the British <ORG> till the ,Indian Independence Act of 1947 was passed and that thereafter, after negotiations with the Indian Dominion, it finally acceded to it. It was never recognized as an international personality by the family of nations. It was all through a vassal of the British <ORG>. <NAME> says in his book on International Law, Vol. 1, 5th Edn., at pp., 165-166, that "the position of the Indian 'States to Great Britain is like that of vassal of States which have no international relations whatever either between themselves or with foreign States". In Hall's International Law, 8th Edn., the learned author says that the States of the Indian Empire of Great Britain were protected States and that they were not subject to international law. The, decision in <NAME> v. Ameer Ruler <NAME> 30 5 Mohammad Abbasi Bahawalpur State(1) holding that the Ameer of Bahawalpur State was a foreign sovereign immune from the jurisdiction of <ORG> was solely based upon the certificate of <ORG> and it does not help us in deciding the present case.

It is, therefore, clear that Hyderabad State did not acquire international personality under the International law and so its ruler could not rely upon international law for claiming immunity from taxation of his personal properties. The problem may be looked at from a different perspective, i.e., on the basis of the provisions of the Indian Income- tax Act. The Indian Income-tax Act , 1922, hereinafter called the Act. admittedly applied to Hyderabad State from January 26, 1950 Under S. 3 of the Act, where any Central Act enacts that income-tax shall be charged in any area at any rate or rates, tax at that rate or those rates shall be charged for that area in accordance with and subject to the provisions of the Act in respect of the total income of the previous year of every individual etc. Under S. 2 of the Finance Act of 1950 (Act 25 of 1950), subject to the provisions of sub-ss. (3), (4) and (5) for the year beginning on 1st day of April 1950, income-tax shall be charged at the rates specified in Part 1 of the First Schedule; under S. 13 thereof. if immediately before the 1st day of April 1950, there was in force in any Part B States, other than the States mentioned therein, any law relating to, income-tax or super-tax or profits of business etc., that law shall cease to have effect for the purposes of assessment under the Indian Income-tax Act , 1922, for the year ending March 31, 1951, or any subsequent year. Under s. 2(14A), "taxable territories" shall be deemed to include the merged territories as respects any period after the 31st day of March, 1949, for any of the purposes of the Act and as respects any period included in the previous year, for the purpose of making any assessment for the year ending on the 31st day of March, 1950, or for any subsequent year. The effect of these provisions is that every individual was liable to income-tax from April 1, 1950, at the rates mentioned in the Finance Act in respect of his total income of the previous year in the merged territories. It is not, and it cannot be, disputed that on April 1, 1950, the assessee was not a ruling chief but an ordinary citizen of Indian, residing, within the meaning of S. 4 of the Act, in that part of India which was a part of Hyderabad State and so he would be liable to income-tax on April 1, 1950, in respect of the (1)  2 All E.R. 64 total income he received in the previous year in the merged territory. It cannot also be disputed that the, said taxable total income would be computed after giving the necessary allowances and deductions in the manner Drescribed by Ch. III of the Act. But it is said that as the assessee was exempted under International Law from taxation of his income of the previous year, the Act could not reach that income. That conclusion, according to the learned counsel for the assessee, flows from the nature of the tax, namely, that though the year of assessment is 1950-51, the charge is not on the income of the year of assessment, but on the income of the previous year. Decided cases no doubt support the contention of the assessee that what is charged in the assessment year or the tax year is the income earned during the accounting year or the earning year. The Act of 1918 which followed the English Act s levied tax on the income of the year of assessment, taking the income of the previous years as a standard or as a measure. But by the Act of 1922 this principle was changed. Now under the Act, tax is assessed in the assessment year on the income of the previous year. '<ORG> in <CITATION> (1) has brought out this distinction when it said :

"In the first place, it is clear to their Lordships that under the express terms of Section 3 of the Indian Income-tax Act, 1922, the subject of charge is not the income of the year of assessment, but the income of the previous year. This is in direct contrast to the English Income-tax Acts, under which the subject of assessment is the income of the year of assessment, though the amount is measured by a yardstick based on previous years."

This Court in <CITATION> marchand N. Shroff (2) restated that principle with approval.

Even so, the income of the assessee during the accounting Year has to be computed only in the manner prescribed by the Act. Deductions and exemptions from the total income can only be those that are provided under the Act. This aspect of the case has been brought out with clarity in <CITATION> (3). The facts in that case were : the respondent resided and carried on business in the District of Jodhpur in Rajasthan which was one of the States specified in Part B. of the First Schedule to the Constitution of India, 1950. The (1) (1945) 13 I.T.R. 221, 223.

(3) (1954) 25 L.T.R. 58.

(2) (1963) 48 I.T.R. 59.

Constitution came into force on January 26, 1950. The Indian Finance Act , 1950, amended the Indian Income-tax Act , 1922, in certain respects and made it applicable to the whole of India, except the State of Jammu and Kashmir. In May 1950, the respondent was required to file a return of his income for the year ending March 31, 1950. It was contended by the respondent that the income which accrued or arose to him or was received by him prior to April 1, 1950, was not liable to tax on the ground that such income was not liable to be charged under the provisions of any law validity in force in: Rajasthan. This Court held that under sub-cl. (1) of cl. (b) of s. 2(14A) of the Income-tax Act, Rajasthan was to be deemed to be a taxable territory for the purpose of s. 4A as respects any period before or after March 31, 1950. On that fiction, as the respondent was a resident in such territories within the meaning of s. 4A , the income accruing or arising to him in Rajasthan during the year 1949-50 would be taxable. This Court further pointed out that <ORG> under Arts. 245 and 246 of the Constitution, read with entry No. 82 of List 1 of the Seventh Schedule thereof, can make laws with respect to taxes on income for the whole of the territory of India with retrospective effect. The effect of the said decision is that though by reason of the Finance Act of 1950 the assessee was assessable to income-tax only from April 1, 1950, his income of the previous year was taxable even though the said income was not liable to tax before the Indian Income-tax Act was made applicable to Rajasthan. To that limited extent it had retrospective operation. If so, we do not see how a person, who was exempted from tax before the Act was extended under the State law or under the International Law, would be in a better position. The legal position as we apprehend may be stated thus Under the Act an individual is assessed to income-tax on the income of the previous year at the rate or rates fixed for the year by the annual Finance Act . The total income of the assessee during the previous year is computed in accordance with the provisions of the Income-tax Act after giving the relevant allowances and deductions therefrom. If during the assessment year an individual is assessable to tax, the fact that during the previous year he was not liable to tax at all because there was no income-tax Act in the area to which the Act was extended or because that under an Income-tax Act in force therein during that year his income was exempted from tax or because of any other law, including International Law, he was so exempt from tax, would not be of any relevance. After the extension of the Act to the Hyderabad State the charge was under the Act and not under the provisions of the previous law. Thereafter, the charge as well as the manner of computation of income did not depend upon the preexisting law, but only upon the provisions of the Act. Applying the said principles to the instant case, it is manifest that after January 26, 1950, the assessee ceased to be a ruling chief and he was, therefore, liable to assessment under the Act. If he was assessable to tax, the statutory charge on his income during the previous year was only traceable to the Act, which was retroactive in operation to that 'extent. His right to exemption, if any, under International Law during the accounting year was irrelevant to the question of taxation under the Act,, as the said law ceased to apply to him during the assessment year.

We, therefore, hold that <ORG> went wrong in hold- ing that the income received by the assessee up to January 26, 1950, was not liable to tax under the Act. The second question reads :

"Whether, having regard to the provisions of Part B States (Taxation Concessions) Order, 1950, the assessee's income during the year of account was totally exempt from tax."

<ORG> answered the question against the assessee. The facts relevant to the question are as follows : The assessee was assessed to income-tax in respect of his income arising in Hyderabad in connection with the assessment years 1950-51 and 1951-52, having regard to the provisions of Part B States (Taxation Concession) Order, 1950. It was contended that the assessee was immune from liability to tax under the law of income-tax of Hyderabad and, therefore, the rate payable by him in terms of the order would be nil; with the result that he would not be liable to any tax. The question turns upon the relevant provisions of the said Order. The said Order was issued by <ORG> in exercise of the power conferred on it under S. 60-A of the Act. Under that section, <ORG> has the power, if it considers necessary or expedient so to do, to avoid any hardship or anomaly, or removing any difficulty, that may arise as a result of the extension of the Act to the merged territories, by general or special law to make an exemption, reduction in rate or other modification in respect of income-tax in favour of any class of income, or in regard to the whole or any part of the, income of any person or class of persons. Pursuant to that power <ORG> issued Part B States (Taxation Concession) Order, 1950, making exemptions, reductions in the rate of tax and modifications specified in that Order. At the outset it may be noticed that under this Order no exemption was given to an Ex-Ruler from paying income-tax or super-tax in respect of income accrued to him in the Hyderabad State. A perusal of paragraphs 3 (ii) (a), 3

(iii), 3 (iv), 3 (v) and 3 (vi), Para 4(iii), Para 5 and Para 6 of the Order shows that the Order was made mainly to give relief to assessees in Part B States where the rates of tax were less than the rates prescribed in the Act. "Indian rate of tax" was defined in Para 3 (iii) and "State rate of tax" was defined in Para 3 (v). Under the Explanation to Para 3 (v), if there was no State law relating to charge of income-tax and super-tax, the Schedule annexed to the Order prescribed the rates. The tax on the basis of "Indian rate of tax" and the "State rate of tax before the appointed day were calculated and the lesser rate was made payable : see paras 5 and 6 of the Order. The entire scheme evolved a machinery to give a rebate on the difference of tax calculated on the basis of the said two rates. The said scheme had nothing to do with exemptions either under the said Order or under the Act. It was argued that, as under the State law the assessee was immune from liability to tax, he was in effect liable to pay only nil tax under the State law. On the basis of nil tax under the State law, the argument proceeded, by applying the principles of the said Order, no tax would be payable by the assessee. We cannot accept this argument. The Order was only intended to provide a machinery for scaling down the rates of tax in relation to the State rates. If there was a State law prescribing rates, it would afford the criterion for scaling down the Indian rate of tax; if there was no State law prescribing the rate, the schedule of rates annexed to the Order would govern the taxation. If the assessee was not liable to pay tax under the State law, his non-liability related only to the domain of exemption. It would be incongruous to say that a person exempted from taxation was paying a nil rate. This would be an obvious attempt to subvert the scheme of the Order to reach a desired result. We, therefore, hold, agreeing with <ORG>, that the assessee was not entitled to any exemptions under the said Order.

We shall now take up the first part of the 4th question which reads :

"Whether on the facts of the case the interest received by the Assessee in respect of 3% <ORG> Income-tax free loan, 1360-70 Fasli of the face value of Rs. 1,45,200, the 2 1/2% <ORG> Income-tax free development loan, 1364-69 fasli of the face value of Rs. 1.05 crores, the 21% <ORG> loan, 1363-73 fasli of the face value of Rs. 200, and the 21% <ORG> loan, 1384 fasli of the face value of Rs. 8 crores was exempt from tax."

This question relates only to the assessment year 1951-52. The securities were issued by the Hyderabad State free from income-tax. <ORG> held that they were exempt from income-tax under S. 8 of the Act. Under S. 8 of the Act, tax shall be payable by an assessee under the head "interest on securities" in respect of the interest receivable by him on any of the securities of <ORG>. But, under the third proviso thereto, the income-tax payable on the interest receivable on the securities of <ORG> issued income-tax free shall be payable by <ORG>. It was argued for the <ORG> that the expression "securities of a State Government" in the proviso does not include the securities issued by the Hyderabad State. This contention was sought to be sustained on the basis of the definition of "Government securities" in <CITATION> of the General Clauses Act, 1897, which reads :

"Government securities" shall mean securities of <ORG> or of any State Government, but in any Act or Regulation made before the commencement of the Constitution shall not include securities of the Government of any Part B State."

Relying upon this clause it was contended that the securities issued by the <ORG> were not covered by the said proviso. There is an obvious fallacy in this argument. To ascertain the ,meaning of an expression in a Central Act , it is permissible to look into the General Clauses Act to find out how that expression is defined in the General Clauses Act . The General Clauses Act affords a dictionary for words used in the Central Act s to the extent provided thereunder. Proviso 3 to s. 8 of the Act does not use the expression "<ORG> securities", but only mentions '.'securities" of a State <ORG>. There is, therefore, no scope to ascertain the meaning of the latter expression with reference to the definition given to a different expression in s. 3 (24) of the General Clauses Act . On the other hand, the ,expression "State <ORG>" is defined in cl. (60) of <CITATION> of the General Clauses Act and it reads :

" "State Government",-(a) as respects anything done before the commencement of the Constitution, shall mean, in a Part A State, <ORG>, Province, in a Part B State, the authority or person authorised at the relevant date to exercise executive government in the corresponding Acceding State, and in a Part C State, <ORG>."

Clause (58) of <CITATION> of the General Clauses Act defines "State" to mean as respects any period before the commencement of the Constitution (Seventh Amendment) Act, 1956, a Part A State, a Part B State or a Part C State. With the aid of the said definitions it will be clear that the expression "State Government" used in the proviso to s. 8 of the Act takes in the Government of the Hyderabad State. If so, in terms of that proviso, the income-tax payable on the interest receivable on the securities of <ORG> issued income-tax free shall be payable by the State Government. Therefore, there are no merits in the contention and <ORG> rightly rejected it. In regard to the same securities the assessee claimed exemp- tion from payment of income-tax and super-tax under item 8 of the Notification dated March 21, 1922, issued by <ORG> of <ORG>. It reads :-

"The interest on Government securities held by, or on behalf of, Ruling Chiefs and Princes of India as their private property."

This exemption applies both for income-tax and super-tax. If the assessee was entitled to this exemption, he would get a larger relief than he would under the third proviso to s. 8 of the Act. The said securities were held by the assessee as his private property and, therefore, he was clearly entitled to this exemption. We, therefore, hold,agreeing with <ORG>, that the assessee was entitled to the exemption under the said item in respect of the said securities.

Then we come to questions 4(ii) and 4(iii). They read Question 4(ii) "Whether on the facts of the case the interest in respect of securities of the Government of India or of <ORG> (including Nizam Government Promissory Note), which became payable to the Assessee under the trust created by him known as "the Family Trust", was exempt from payment of tax in his hands."

Question 4(iii) "Whether the interest in respect of securities of the Government of India or of <ORG> (including Nizam Government Promissory Note,) which became payable to the Assessee under the trust created by him known as "the Miscellaneous Trust' was exempt from payment of tax in his hands."

These two questions relate to Government securities settled by the assessee in trust, but the income whereof was payable to him under the provisions of the relevant deeds of trust. The assessee executed the two trusts--one dated May 10, 1950, known as H.E.H. Nizam's "Family Trust" and the other dated August 6, 1950, known as H.E.H. Nizam's "Miscellaneous Trust'. Under cl. 3 of the deed of trust relating, to <ORG>, the net income of the trust fund, after defraying the expenses and charges of collection, had to be paid by the trustees thereunder to the assessee for and during the term of his natural life. Under the Miscellaneous Trust it was provided that subject to the provisions of sub-cls. (a) to (j) of cl. 2 of the said deed, the trustees should pay the balance of the interest and income of the trust fund to the assessee for and during the term of his natural life. At this stage it is not necessary to notice the other recitals in the deeds. We shall have to

-consider the recitals in the said two deeds in greater detail at a later stage. The assessee claimed exemption in regard to the said interest on the ground that he was exempted under the third proviso to S. 8 of the Act and under item No. 8 of the notification issued by <ORG> on March 21, 1922. <ORG> held that after the execution of the trust deed, the assessee was divested of his ownership of the securities and the trustees became their owners. On that basis, it further held that, though the income was interest on securities in the hands of the trustees, it was in the hands of the assessee only the income which he got from the trustees. Briefly stated, <ORG> held that the character of the income, namely, interest on securities, had changed when it reached the hands of the assessee. The question falls to be decided on a construction of s. 41 of the Act. The relevant part of s. 41 reads :

"(1) In the case of income, profits or gains chargeable under this Act which trustee or trustees appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise are entitled to receive on behalf of any person, the tax shall be levied upon and recoverable from such trustee or trustees, in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable, and all the provisions of this Act shall apply accordingly (2) Nothing contained. in sub-section (1) shalt prevent either the direct assessment of the person on whose behalf income, profits or gains therein referred to are receivable, or the recovery from such person of the tax payable in respect of such income, profits or gains."

Under this section the <ORG> has the option to levy or collect tax from the trustee or the beneficiary; the tax can be levied upon and recoverable from the trustee in the like manner and to the same amount as it would be leviable upon and recoverable from` the person on whose behalf such income, profits or gains are receivable. In short, it imposes a vicarious liability on the trustee. The expression "all the provisions of this Act shall apply accordingly" indicates that there is no distinction in the matter of assessability of the income in the hands of a trustee or the beneficiary, as the case may be. Indeed, s. 41 of the Act comes into play only after the income is computed in accordance with Ch. III of the Act. In the case of income from securities s. 8 applies, and under the second proviso thereto, the income-tax payable on the interest receivable on any security of <ORG> issued income-tax free shall be payable by <ORG>. No tax on interest on such securities is payable by the assessee. After ascertaining the income and after giving the exemptions, the income-tax authority has the option to assess the beneficiary directly or, in respect of the same income, the, trustee on behalf of the beneficiary. This construction finds support in the decision of <ORG> in <CITATION> (1). If that be the scope of the assessment under s. 41 of the Act, we find it difficult to appreciate the contention that the interest on securities in the hands of the trustee becomes an income other than such interest in the hands of the beneficiary. The interest retains its character whether the assessment is made on the trustee or the beneficiary. We cannot, therefore, accept the construction put upon s. 41 of the Act by <ORG>.

This legal position only gives the assessee relief in regard' to income-tax payable on the interest from securities; but the third (1) (1958) 34 I.T.R. 187.

proviso to s. 8 of the Act' does not transfer the liability of the assessee to pay super-tax to <ORG>. The exemption from super-tax was claimed under item 8 of the notification issued under s. 60 of the Act. We have extracted that item earlier in another context. The interest mentioned in this item is exempt from both income- tax and super-tax. The short question, therefore, is whether the interest payable to the assessee was in respect of <ORG> securities held by or on behalf of the assessee as his private property. The answer to this question depends upon the provisions of the said two trusts, namely, <ORG> <ORG>. <ORG> was executed by the assessee on May 10, 1950, in respect of the <ORG> securities of aggregate face value of Rs. 9 chores which were his private properties. Under the deed of trust, the trustees were appointed and the securities were handed over to them. The trustees so appointed were to collect and recover the interest and other income from the securities and were, after meeting the overhead charges, to pay the residue of the income of the trust fund to the assessee absolutely for and during the term of his natural life. After the death of the assessee, the trustees should divide the trust fund and allot it to the innumerable relatives and others mentioned in the trust deed. The trust deed also gave various other directions to the trustees. In short. under the said trust deed the title to the securities was transferred to the trustees and they were under an obligation to pay the interest or to give the corpus in the manner prescribed thereunder during the life time of the assessee or thereafter. Under the trust deed the securities were not held by the trustees on behalf of the assessee as his private property : they were held by the trustees for carrying out the trust in terms of the trust deed. After the execution of the trust deed, the securities ceased to be the private property of the assessee and thereafter he would only be entitled to the interest on the securities during his life time in the manner prescribed thereunder. We cannot, therefore, hold that the securities were held by the trustees as private property ;of the assessee.

The Miscellaneous Trust consisted of Hyderabad and Govern- ment of India Loans. Under this trust deed, trustees were appointed and the said amounts were transferred to them. Under the document the trustees wereunder an obligation to manage the said fund, recover interest and other income therefrom, and, after bearing the overhead charges, pay the income therefrom in different proportions to the relatives of the assessee and other persons mentioned therein. It is not necessary to consider the complicated provisions of this document. It would be enough to state that under this trust deed also the amounts representing them loans mentioned therein ceased to be the private property of the, assessee and the trustees thereunder held the said property for discharging the various obligations imposed on them and for paying the income therefrom to the different persons mentioned therein and in the manner prescribed thereunder. The Government loans, therefore, ceased to be the private property of the assessee and after the execution of the trust deed they were held by the trustees not on behalf of the assessee as his private property, but for the purpose of discharging the obligations imposed on, them under the deed. We, therefore, hold that the income from the said two trusts did not earn the exemption under item 8 of the said notification.

The result of our view is that in regard to the interest receivable by the assessee from the said securities and loans, he was not liable to pay income-tax, but he was not exempt from payment of super-tax under item 8 of the said notification.

The next question, as recast by <ORG>, reads Question 4 (iv) "Whether on the facts of the case, the interest at Rs. 1,97,180/- on the <ORG> securities should be regarded as having accrued in the Hyderabad State and therefore chargeable at the rate obtaining under the Hyderabad Income-tax Act ." It was argued that the income sought to be taxed accrued in Hyderabad, because the securities were effaced to be payable in Hyderabad and, therefore, chargeable only at the rate obtaining under the Hyderabad Income-tax Act . <ORG> negatived the contention. It held that the said interest accrued only in British India. Though the assessee raised the question of the correctness of the view expressed by <ORG> in the special leave petition, at the time of arguments the learned counsel for the assessee did not press this point, Therefore, the opinion expressed by <ORG> in this regard stands. We should not be understood to have expressed our view one way or other. In the result, we answer the questions as follows Question 1 in the affirmative.

Question 2 in the negative.

Question 3 in the negative.

Question 4(i) : in the affirmative .lm15 Question 4(ii) : the assessee was exempt from payment of income-tax, but he was not exempt from payment of super-tax. Question 4(iii) : the assessee was exempt from payment of income-tax. but he was not exempt from payment of super-tax. Question 4(iv) : in the negative.

The aforesaid answers given by us to the 4 questions referred to <ORG> by <ORG> will be substituted in the place of those given by <ORG>. We modify the order of <ORG> accordingly in all the appeals. As the parties failed in part and succeeded in part, they will bear their own costs here and in <ORG>.

Appeals allowed in part.


ORDER Venkatachaliah, Ojha, J.

1. Appellants in these appeals by Special Leave, are the Defendants in Civil Suit No. 1220 of 1988 on the original side of <ORG> and assail the order dated 19-1-1990 of <ORG> of <ORG> granting in appeal and in reversal of the order dated 2-3-1989 of the learned single Judge trying the suit an injunction restraining appellants from passing-off their medicinal product Cal-De-Ce as that of the Respondent-Plaintiff, Respondent claimed to have acquired a right in that Trade-mark by continuous user. The temporary injunction was refused by the learned Single-Judge. But in appeals, O.S.A. Nos. 111 and 112 of 1989, preferred against the refusal, the division bench granted the temporary injunction in appeal,

2. The appeals have come up for orders on the prayer for stay. As the considerations relevant for decision on the prayer for stay, by and large, conclude the subject-matter of the main appeals, we proceed to dispose of the main appeals themselves.

We have heard <NAME>, learned Senior Counsel for the appellants and <NAME>, learned Senior Counsel for the respondents. We have been taken through the orders of the learned trial-Judge and of <ORG> in appeal.

3. <ORG>, first appellant, claiming to be registered proprietor of the Registered Trade-mark Cal-De-Ce entered into an agreement dated 28-3-1986 with <ORG> (<ORG>), the respondent, under which <ORG> agreed to manufacture vitaminsed Calcium Gluconate Tablets under the said registered Trade-Mark Cal-De-Ce and sell the entire production to the <ORG> It would appear that pursuant to and in implementation of these arrangements <ORG> applied for the requisite manufacturing-license from the Drug Controller under the Drugs and Cosmetics Act , 1940, in the course of the processing of which <ORG> furnished before the Drug Controller an undertaking that <ORG>, would not authorize the use of its Trade-Mark Cal-De-Ce by any other company and further not to manufacture Cal-De-Ce with effect from 1st July, 1986, either by itself or under sole licenses from it. <ORG> issued the manufacturing licence to <ORG>.

The working of the agreement dated 28-3-198.6 between the parties, however, appears to have run into serious troubles. It is not necessary to advert to the rival contentions of the parties on the merits of this controversy as they may have to be gone into by <ORG> in the pending suit. The disputes culminated in <ORG>, purporting to rescind the agreement by its notice dated 30th November, 1988 and calling upon <ORG> to stop manufacture of Cal-De-Ce under the Trade-mark. It would also appear that <ORG>, entered into a separate manufacturing arrangement with <ORG>, the second appellant, at Madras, under licenses issued to the second appellant by the authority administering the Drug and Cosmetics Act , 1940 in that State.

It is at this stage that the <ORG> came forward with the present suit and sought temporary injunction.

4. The case of <ORG> is that its agreement dated 28-2-1986 with <ORG>, was itself void in that its object was one forbidden by law ; that it would, if permitted defeat and violate several statutory provisions and prohibitions, that the agreement thus, out of way, the undertaking furnished on 21st June 1986 by <ORG>, to the Drug Controller in Karnataka, had the effect, in law, of and amounted to an abandonment by <ORG>, of its proprietorship of the Registered Trade-Mark Cal-De-Ce and all of such exclusive rights as <ORG>, had or may have had in respect of that Trade-Mark and that the subsequent continued user of the said Trade-Mark by <ORG> under the Drug Controller's licence amounted to an independent user of the Trade-Mark by <ORG> in its own right as, indeed, according to <ORG>, the said Trade-Mark after its abandonment by <ORG>, came to be in an ascent unwonted condition eligible to be picked up and used by any body. It was said that the user of the Trade-Mark by <ORG> after 21st of June 1986 amounted to such an independent user on the strength of which <ORG> claimed that it was entitled to maintain a passing off action even against <ORG> The mere earlier registration of the Trade-Mark by <ORG>, it is urged, is no evidence of earlier user and with the abandonment of the Trade-Mark by <ORG> <ORG> is entitled on the strength of its continuous user, to restrain <ORG> from manufacture.

The point for consideration is whether there is a prima facie case on which <ORG> could be held entitled to restrain <ORG> and <ORG> from manufacturing and marketing goods under the Trade name Cal-De-Ce and whether on considerations of balance of convenience and comparative hardship a temporary injunction should issue. The corollary is that even if the injunction sought by <ORG> is refused, that does not, ipso-facto, entitled <ORG> and <ORG> to manufacture and market the goods if they are not otherwise entitled to do so under the relevant laws regulating the matter.

5. Usually, the prayer for grant of an interlocutory injunction is at a stage when the existence of the legal right asserted by the plaintiff and its alleged violation are both contested and uncertain and remain uncertain till they are established at the trial on evidence. The court, at this stage, acts on certain well settled principles of administration of this form of interlocutory remedy which is both temporary and discretionary. The object of the interlocutory injucntion, it is stated is to protect the plaintiff against injury by violation of his rights for which he could not adequately be compensated in damages recoverable in the action if the uncertainty were resolved in his favour at the trial. The need for such protection must be weighed against the corresponding need of the defendant to be protected against injury resulting from his having been prevented from exercising his own legal rights for which he could not be adequately compensated. The court must weigh one need against another and determine where the "balance of convenience lies". The interlocutory remedy is intended to preserve in status quo, the rights of parties which may appear on a prima facie. The court also, in restraining a defendant from exercising what he considers his legal right but what the plaintiff would like to be prevented, puts into the scales, as a relevant consideration whether the defendant has yet to commence his enterprise or whether he has already been doing so in which latter case considerations somewhat different from those that apply to a case where the defendant is yet to commence his enterprise, are attracted.

6. In the present case, the learned single Judge held that, at all events as between <ORG> and <ORG> even to the extent considerations relevant for a passing-off action go, the latter was undisputably the earlier user of <ORG> in that <ORG> was manufacturing and marketing the Calcium Glouconate Vitamin Tablets under <ORG> Cal-De-Ce at its own factory in Bombay from August 1983 upto June 1986. If this is correct, <ORG>'s user cannot be held to be prior user. It is pertinent to note, and perhaps emphasise, that the appellate bench did not disturb this finding at all. Learned Single Judge was persuaded to the view that, in any event so far as the prima facie position as to the test of earlier user is concerned <ORG> could not be held entitled to interlocutory order in its favour on the basis of the earlier user claimed by it. The interlocutory relief was accordingly refused against both <NAME> and <NAME>.

7. Aggrieved by this order of the Trial Judge declining the interlocutory injunction <ORG> preferred O.S.A. Nos. 111-112 of 1989 before <ORG>. <ORG>, however, re-assessed the material considered by the single Judge and came to a different conclusion. <ORG> held :

The plaintiffs had licenses to manufacture for sale with the trade names and had indeed sold the manufactured stock in bulk to the defendants Its user of the trade marks pursuant to the licence obtained, was nut the user of the registered user under Sections 48 and 49 of the Trade and Merchandise Marks Act , not was its manufacture carried out in pursuance of any loan licence taken out by the defendant under rule 69-A of the Drugs and Cosmetics Rules.

The plaintiffs manufacture with the trade names, under licenses in the trade names and the consequent user of the trade names establish a prima facie case for passing off action and the balance of convenience, requiring and the status quo to be maintained, the plaintiff having had the benefit of the injunction from 23-9-1988 till 2-3-1989 when it was vacated and from 2-5-1989 when this Court granted the injunction, the plaintiff would be entitled to have the interim injunction as prayed for by them.

Appellants-Defendants have come up in appeal here.

8. On a consideration of the matter, we are afraid, <ORG> fell into error on own important propositions. The first is a misdirection in regard to the very scope and nature of the appeals before it and the limitations on the powers of <ORG> to substitute its own discretion in an appeal preferred against a discretionary order. The second pertains to the infirmities in the ratiocinations as to the quality of <ORG>'s alleged user of the Trade-Mark on which the passing-off action is founded. We shall deal with these two separately.

9. The appeals before <ORG> were against the exercise of discretion by the Single Judge. In such appeals, <ORG> will not interfere with the exercise of discretion of the court of first instance and substitute its own discretion except where the discretion has been shown to have been exercised arbitrarily, or capriciously or perversely or where the court had ignored the settled principles of law regulating grant or refusal of interlocutory injunctions. An appeal against exercise of discretion is said to be an appeal on principle. <ORG> will not reassess the material and seek to reach a conclusion different from the one reached by the court below if the one reached by the court was reasonably possible on the material. The appellate court would normally not be justified in interfering with the exercise of discretion under appeal solely on the ground that if it had considered the matter at the trial stage it would have come to a contrary conclusion. If the discretion has been exercised by <ORG> reasonably and in a judicial manner the fact that the appellate court would have taken a different view may not justify interference with the trial court's exercise of discretion. After referring to these principles <NAME>, J. in <CITATION> :

... These principles are well established, but as has been observed by Viscount <NAME> in <ORG> v. <NAME> the law as to the reversal by a court of appeal of an order made by a judge below in the exercise of his discretion is well established, and any difficulty that arises is due only to the application of well settled principles in an individual case.

The appellate judgment does not seem to defer to this principle.

10. We may now examine the tenability of the grounds on which <ORG> reversed the single Judge's refusal. The passing-off action was based on the asserted right to a trade mark said to have been acquired by continuous user. According to the appellate-bench the user by <ORG> pursuant to the Drug-Controller's licence and after the under taking given by <ORG> "was not registered user under Sections 48 and 49 of the Trade and Merchandise Marks Act nor was it a manufacture carried out in pursuance of a loan because......" In-passing-off action this would be relevant only in a negative way. Positively, the plaintiff must establish a prior user of his own prima facie. <ORG>'s case appears silent on this requirement in the context of a specific finding of the single judge as to user by <ORG> prior to June, 1986. <ORG>'s user is admittedly after June, 1986.

An infringement action is available where there is violation of specific property-right acquired under and recognised by the statute. In a passing-of action, however, the plaintiff's right is independent of such a statutory right to a trade mark and is against the conduct of the defendant which lends to or is intended or calculated to lead to deception. Passing-off is said to be a species of unfair trade competition or of actionable unfair trading by which one person, through deception, attempts to obtain an economic benefit of the reputation which another has established for himself in a particular trade or business. The action is regarded as an action for deceit. The tort of passing-off involves a misrepresentation made by a trade to his prospective customers calculated to injure, as a reasonably foreseeable consequence, the business or goodwill of another which actually or probably, causes damage to the business or goodwill of the other trader. Speaking of the legal classification of this form of action, Lord <NAME> said :

Unfair trading as a wrong actionable at the suit of other traders who thereby suffer loss of business or goodwill may take a variety of forms to some of which separate lables have become attached in English law. Conspiracy to injure a person in his trade or business is one, slander of goods another but most protean is that which is generally and nowadays, perhaps misleadingly, described as "passing off". The form that unfair trading takes will alter with the ways in which trade is carried on and business reputation and goodwill acquired. <NAME>'s maker of the better mousetrap if secluded in his house built in the woods would today be unlikely to find a path beaten to his door in the absence of a costly advertising campaign to acquaint the public with the excellence of his wares" See <NAME> v. <ORG> 1979 All E.R. 731.

11. <ORG> says that it is free from the inhibitions of the terms of the agreement dated 28th March 1986 on the ground that agreement is itself void for all purposes and, therefore, do not attach to or diminish the quality of its user, though commenced under that agreement. <ORG> says its user is referable to <ORG> licence. But even assuming that the terms of the agreement dated 28th March 1986 are not to be put into the scales to determine the title to and character of the user by <ORG>, two crucial positions still stage <ORG> in the face.

The first is that the Drug Controller's licence claimed by <ORG> as the source of its right to the user of the trade-mark, itself expressly stipulates that the goods to be manufactured pursuant to the said licence shall be goods under the registered Trade-mark, of <ORG> The effect of this on the quality of the user has not been examined by the Appellate-Bench.

Secondly, even if a prior registration of a Trade mark is not necessarily evidence of prior user as contended by <NAME>, <ORG> cannot, prima facie, explain how in a passing-off action its user subsequent to June 1986 would prevail over the prima facie finding that <ORG> was manufacturing Calcium Gluconate Tablets under the trade-mark Cal-De-Ce at its own factory in Bombay from August 1983 to June 1986. <ORG> does not dislodge this finding nor does it recognise the crucial effect of prior use by the defendant on the plaintiff's case in a passing-off action. It appears to us that it was not an appropriate case where the appellate Bench could have interfered with the discretion exercised by the learned <NAME>, Judge.

12. We, accordingly, allow these appeals, set aside order dated 19-1-1990 of <ORG> in so far as it pertains to Civil Suit of 1220/ 1988 and restore the order dated 2-3-1989 made by the learned Single Judge on Applications 4941 and 4942 of 1988. Since we are examining the matter at an interlocutory stage, none of the observations contained in this order shall affect the final decision of the suit on the merits after evidence.

13. The order of the appellate Bench is common to the present suit as well as certain other proceedings between <ORG> on the one hand and certain other parties on the other. This judgment and the observations therein are confined to the facts of Civil Suit No. 1220/1988. The correctness of the Appellate Order in respect of other cases is not the subject-matter of these appeals and that, therefore, whatever we have said shall not prejudice the parties in those other proceedings.

Having regard to the nature of the controversy, it will be appropriate for <ORG> to dispose of the Suit expeditiously and we request <ORG> to dispose of the Suit within six months from today.

In the circumstances of this case, there will be no orders as to costs in the appeals.

<ORG> v. <ORG>

1. We have heard <NAME>, learned Senior Counsel for the appellant and <NAME>, learned Senior Counsel for the respondent.

Special leave granted.

2. The grievance of the appellant is that its appeal before the Learned Single-Judge of <ORG> preferred against an interlocutory order granting an injunction in a suit pending on the file of <ORG> was disposed of without giving opportunity to the learned Counsel for the appellant to argue the matter.

3. The matter admits of being disposed of on the basis of <NAME> suggestion which we consider a fair and generous one. <NAME> for the respondent fairly consents to an order-and we accordingly make that order-setting aside the order under appeal and remitting the matter to <ORG> for consideration afresh of the appeal for admission after affording another opportunity to the appellant of being heard. The matter is disposed of accordingly. No costs.