JUDGMENT <NAME>, J.

1. This batch of income-tax reference cases at the instance of the <ORG> relates to the assessment years 1986-87, 1987-88, 1988-89 and 1989-90. I.T.R. Nos. 92 and 93 of 1995 arise from I. T. A. Nos. 278/Coch. of 1989 and 801/Coch. of 1992 relating to the assessment years 1986-87 and 1987-88 and I. T. R. Nos. 112 and 113 of 1996 arise from I. T. A. Nos. 913/Coch of 1990 and 507/Coch of 1991 relating to the assessment years 1988-89 and 1989-90. The common question referred to us for decision is :

"Whether, on the facts and in the circumstances of the case, the asses-see is entitled to claim depreciation on the assets taken over from the partnership firms at the revalued figure ?"

2. An additional question has been referred to us for decision in I. T. R. Nos. 112 and 113 of 1996, which is as follows :

"Whether Explanation 3 to Section 43(1) is attracted to the facts and circumstances of the case ?"

3. The facts of the case are condensed thus : The assessee is a company known as "<ORG>" engaged in the business of purchasing raw carbon dioxide and bottling it in cylinders after purification. The assessee was a partner in a partnership firm consisting of nine partners. The other eight partners were the shareholders of the assessee-company. The partnership firm was dissolved on February 25, 1985, and the assets and liabilities of the firm were taken over by the assessee-company. The written down value of the assets of the firm was Rs. 3,16,110. However, the assets were revalued at a figure of Rs. 22,30,795 and depreciation claimed on the aforesaid amount. However, the Assessing Officer did not allow depreciation on the enhanced value of assets for the years 1986-87 and 1987-88. For the assessment years 1988-89 and 1989-90 also, the Assessing Officer disallowed a similar claim for depreciation. The appeals were filed before the Commissioner of Income-tax (Appeals) as against the orders of the Assessing Officer. The Commissioner of Income-tax (Appeals) also disallowed the claim and thereby the orders of <ORG> were upheld. In second appeal, the <ORG> held that the assessee was entitled to depreciation on the enhanced value of assets as revalued. The <ORG> further found that the revaluation of the assets was bona fide for adjustment of the mutual rights of the partners and Explanation 3 to Section 43(1) of the Act was not applicable to the facts of the case. Being aggrieved by the orders passed by the <ORG>, the <ORG> filed applications for reference before the <ORG> in respect of all the assessment years.

4. The following questions of law were raised for reference in respect of the assessment years 1986-87 and 1987-88 :

"1. Whether, on the facts and in the circumstances of the case :

(i) the assessee is entitled to claim depreciation on the assets 'taken over' from the partnership firm at the revalued figure ;

(ii) was there 'take over' of assets by the assessee from the partnership firm ?

(iii) are not the reconstitution, dissolution, take over and the revaluation, etc., a design or device to reduce the tax liability ?

2. Whether, on the facts and in the circumstances of the case and also on a consideration of the terms with reference to dissolution of the firm in the last reconstitution of the firm evidenced by an instrument dated September 1, 1985, and comparing the same with the terms in the earlier deed or deeds of reconstitution earlier effected, is not the reconstitution dated September 1, 1985, and the immediate dissolution on February 25, 1985, only a ruse or design or device to reduce the tax liability by setting up the claim for higher amount of depreciation on the enhanced value of assets and is not the order of the <ORG> also vitiated for not considering intention or design in the light of the above instruments ?

3. Whether, on the facts and in the circumstances of the case, is not the admission of the assessee-company as a partner and the subsequent dissolution of the partnership deed hit by Explanation 3 to Section 43(1) of the Income-tax Act ?

4. Whether, on the facts and in the circumstances of the case and also on a consideration of the terms in the deed of reconstitution dated September 1, 1985, and the earlier deeds of reconstitution, the <ORG> is right in law and fact in holding that 'the revaluation of the assets on the eve of the dissolution of the firm was with a view bona fide done for the adjustment of mutual rights of the partners in the partnership firm' and is not the above finding wrong, baseless against the principles laid down in <NAME> case [1967] 63 ITR 609 (SC) at page 616 and McDowell and also against reality, human conduct and commonsense ?

5. Whether, on the facts and in the circumstances of the case and also in the light of the principle laid down in <NAME> case [1967] 63 ITR 609 (SC) at page 616, the reasoning and findings of the <ORG> in paragraph 11 of the order is correct and valid ?

6. Whether, on the facts and in the circumstances of the case and also on a consideration of the submissions of the <ORG> noted in paragraphs 12 and 13 of the order and also on a consideration of the terms in the reconstituted deeds and the dissolution deed, the <ORG> is right in law and fact in holding that the transactions are bona fide and real and are not the findings against the dictum and procedure laid down in Meenakshi (page 616): 'But in certain exceptional cases the court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade' ?

7. Whether, on the facts and in the circumstances of the case and taking into account the major submissions of the <ORG> in the case, the <ORG> is right in law in holding that 'the argument that the payments were made from out of the depreciation is not available to the <ORG>'? and is not the above finding wrong and lacks perspective ?

8. Whether, on the peculiar facts and peculiar circumstances of this case, on the eve of the dissolution of the partnership firm could its assets be factually and legally revalued at a figure of Rs. 22,38,795 as against the written down value of Rs. 3,16,110 ?

9. Whether, on the facts and in the circumstances of the case, the <ORG> is right in law and fact in holding that 'the amount of Rs. 1,91,468 to be exact, the sum of Rs. 2,11,588 cannot be deducted from the value of the assets acquired' ?"

5. Likewise, in respect of the assessment years 1988-89 and 1989-90, the questions of law raised for reference were the following :

"1. Whether, on the facts and in the circumstances of the case, the <ORG> is right in holding :

'the company was originally formed by taking over all the assets and liabilities of the erstwhile firm, <ORG>, in which the assessee was a partner', and is not the above finding legally and factually wrong ?

2. Whether, on the facts and in the circumstances of the case,--

3. Whether, on the facts and in the circumstances of the case and also in the light of the principles laid down in <NAME> case [1967] 63 ITR 609 (SC) at page 616, the reasoning and conclusion of the <ORG> are valid and in accordance with law ?

4. Whether, on the facts and in the circumstances of the case and considering the difference in facts noted by the <ORG> in paragraph 7 of the order (in the matter of the take over of assets by the assessee from <NAME> and <NAME> and from <ORG>),

(i) the <ORG> is legally and factually right in its present consistent order ;

(ii) will not the conclusion of the <ORG> in paragraph 7 (dealing with Power Traction Co.) militate against the view in paragraph 3 (dealing with Poulose and Mathen) ?

5. Whether, on the facts and in the circumstances of the case and after having found (in the case of <ORG>) :

Therefore, it cannot be said that the assessee just purchased the asset at a higher value for the purpose of claiming higher amount of depreciation and this attracted the provisions of Explanation 3 to Section 43(1) of the Income-tax Act'-

should not the <ORG> have taken a contrary decision in paragraph 3 while dealing with <NAME> and Mathen--'a case of just purchased' and is not the above finding bereft of any sanctity in view of the consistent finding on inconsistent and divergent facts ?

6. Whether, on the facts and in the circumstances of the case and in the light of <NAME>, the assessee is entitled to depreciation on the enhanced value ?

7. Whether, on the facts and in the circumstances of the case did Explanation 3 to Section 43(1) of the Income-tax Act, apply to the facts of the case ?"

6. Since the <ORG> has rejected the reference applications the <ORG> filed O.P. Nos. 3103 of 1994 and 17982 of 1993 before this court in respect of the years 1988-89 and 1989-90 under Section 256(2) of the Act. After hearing, this court directed the <ORG> to refer the questions of law quoted in the judgment. In respect of the years 1986-87 and 1987-88 also the <ORG> approached this court and this court directed the <ORG> to refer the question of law quoted in the judgment dated October 21, 1994, in O. P. Nos. 15948 and 16707 of 1993. While directing to refer the above questions this court observed that those questions would cover all the aspects of the case which the <ORG> had raised in its reference application. Therefore, what we propose to do is to answer the questions referred to us by the <ORG> pursuant to the direction of this court in O.P. Nos. 15948 and 16707 of 1993, relating to the years 1986-87 and 1987-88 (I. T. R. Nos. 92 and 93 of 1995) and O.P. Nos. 17982 of 1993 and 3103 of 1994, relating to the years 1988-89 and 1989-90 (I. T. R. Nos. 112 and 113 of 1996).

7. Let us examine as to how the Assessing Officer hats completed the first assessment relating to the year 1986-87 which contains all the material particulars for taking decision in these cases. While arriving at a loss of Rs. 9,84,906 the company has claimed depreciation amounting to Rs. 10,06,657 for the assessment year 1986-87. The total value of assets taken over by the firm, <ORG>, was Rs. 22,35,540. There were eight partners in the said firm and they were members of the families of <ORG>. As per the terms of the partnership deed dated September 1, 1984, the assessee-company was admitted as a partner with 10 per cent. share. The firm was dissolved on February 25, 1985, and all the assets and liabilities of the firm were taken over by the assessee-company. All the remaining partners had been allotted shares in the company. Thus the shareholders of the company were the partners of the erstwhile firm. As per the account books of the firm, the written down value as on December 31, 1984, was Rs. 3,16,110. After the company had taken over the assets of the firm after its dissolution the assets were revalued as on February 25, 1985, at Rs. 22,30,795. The assessee-company claimed depreciation on the value of Rs. 22,30,795 as per the revised valuation of the assets. The Assessing Officer came to the conclusion that the main purpose of the dissolution of the firm and transferring the assets and liabilities to the company was only with a view to reduce the liability to income-tax by claiming depreciation with reference to the enhanced cost of the company. Therefore, he took the view that Explanation 3 to Section 43(1) should be adopted. Accordingly, the Assessing Officer calculated depreciation on the basis of the total value of the assets, namely, Rs. 3,16,110 and disallowed the claim for depreciation on Rs. 22,30,795. Explanation 3 to Section 43(1) is as follows :

"43. Definitions of certain terms relevant to income from profits and gains of business or profession.--In Sections 28 to 41 and in this section, unless the context otherwise requires,--

(1) 'actual cost' means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority : . . .

Explanation 3.--Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the Assessing Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such amount as the Assessing Officer may, with the previous approval of the Deputy Commissioner, determine having regard to all the circumstances of the case."

8. What is "actual cost" contemplated under Section 43 ? It means the actual cost of the assets to the assessee, reduced by that portion of the cost met by any other person or authority directly or indirectly. The prefix of the word "actual" to the word "cost" is obviously intended to make emphasis on the reality and genuineness thereof. The fixation of "actual cost" arises only when the Assessing Officer is satisfied that the main purpose of the transfer of the assets which were used by any other person at any time for the purpose of his business or profession, directly or indirectly to the assessee was the reduction of a liability to income-tax by claiming depreciation with reference to an enhanced cost. When the Assessing Officer is so satisfied, he had wide discretion to fix the "actual cost" having regard to all the circumstances of the case subject to the previous approval of the Deputy Commissioner.

9. <ORG> in <CITATION>  156 ITR 509, was examining a case of transfer of assets within the terms of Section 45 of the Act. In this context, the apex court has laid down the scope of the powers of the Assessing Officer and said (page 524) : "he is entitled to penetrate the veil covering it and ascertain the truth". What is required to be examined is whether the transaction of creating the partnership is a genuine or a sham transaction and, even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on a capital gain.

10. Explanation 3 to Section 43(1) corresponds to Section 10(5)(a) of the 1922 Act. Section 10(5)(a) came up for interpretation before <ORG> in <CITATION>  57 ITR 540. There the court held to the following effect (headnote) :

"... that the increase in value of the assets was substantial and out of all proportion to the written down value in the hands of the previous assessee. The reasons advanced for the change-over did not justify the increase in value of assets. The main purpose of the change-over was therefore the reduction of liability to income-tax by claiming depreciation with reference to enhanced cost and the first proviso to Section 10(5)(a) would apply. The Income-tax Officer had power to determine the actual cost of the assets with the previous approval of the Inspecting Assistant Commissioner."

11. Counsel for the <ORG> submitted that the principle laid down in the above decision would squarely apply to the present case inasmuch as the facts are more or less identical. There the partners of a firm constituted themselves into a private limited company. The shareholders of the company were the old partners and their nominees and shares in the company were allotted in the same proportion as shares held by the partners in the firm. At the time of the change-over the company valued assets received from the firm at Rs. 63,000 and Rs. 87,000 while their written down value in the hands of the firm was Rs. 3,994 and Rs. 13,210, respectively. The company claimed that the reasons for the change-over were efficient working of the concern, due control over its members and preservation of rights of some of its opulent members. The company claimed depreciation allowance on its assets on the basis of their enhanced value as shown in its books. In the aforesaid factual background the court observed (page 545) :

"But this much is certain that the inflation has become possible on account of the change-over. The question then in these circumstances is, whether the main purpose for the change-over or transfer of assets to the assessee was directly or indirectly the reduction of a liability to income-tax by claiming depreciation with reference to an enhanced cost. If that be inferred from the circumstances the matter would be governed by the proviso to Section 10(5)(a) . It must be borne in mind that for the application of the proviso that need not be the only reason for the change-over or transfer of assets. There may be other reasons also but the main purpose should be the reduction of liability to income-tax directly or indirectly by claiming depreciation on enhanced value." (emphasis supplied)

12. The Assessing Officer has no grievance against the revaluation of the assets done by the approved valuer. The <ORG>, however, observed that his grievance was that it was done with a view to reduce tax liability. It is an admitted case that the revaluation of the assets was made on February 25, 1985, and on the same day the firm was dissolved. The written down value in the books of account of the firm as on December 31, 1984, was Rs. 3,16,110 whereas the value of the assets as per revaluation was Rs. 22,30,795. On behalf of the assessee, it was pointed out that in the event of dissolution of a partnership firm, a true account of all assets and liabilities should be taken in order to adjust the mutual rights of the partners in the partnership property. In support of this proposition the decision of <ORG> in <CITATION>  189 ITR 285, 306 was relied on. The <ORG> highlights the following passage from Pickles on Accountancy (third edn.) as quoted in the above decision of <ORG> at page 650 of the report.

"In the event of the accounts being drawn up to the date of death or retirement, no departure from the normal procedure arises, but it will be necessary to see that every revaluation required by the terms of the partnership agreement is made. It has been laid down judicially that, in the absence of contrary agreement, all assets and liabilities must be taken at a 'fair value' not merely a 'book value' basis, thus involving recording entries for both appreciation and depreciation of assets and liabilities. This rule is applicable, notwithstanding the omission of a particular item from the books, e.g., investments, goodwill (<NAME> v. <NAME> [1922] 92 LJ Ch 136 (HL)). Obviously, the net effect of the revaluation will be a profit or loss divisible in the agreed profit or loss-sharing ratios."

13. This is a well known principle of accountancy and we have no manner of dispute as to its applicability in taking accounts for purposes of dissolution. No doubt the firm and partners being commercial men would value the assets only on a real basis and not at cost or at their other value appearing in the books. Therefore, it is all the more certain that the real rights of the partners cannot be mutually adjusted on any other basis. But the question that faces the Assessing Officer is that the position being so strong as it appears to be, why did he not adopt Explanation 3 to Section 43(1) when he sufficiently sees that after effecting the transfer there was a direct or indirect attempt to reduce the liability to income-tax. The purpose of the said Explanation is to cover all such contingencies and in that view wide powers are conferred on the Assessing Officer. In the present case, in fact, he did it successfully obviating all collusive device in effecting the transaction though it cannot reasonably be said as the sole purpose of the transaction.

14. Placing reliance on the decision of <ORG> in <CITATION>  120 ITR 49, it was argued on behalf of the assessee that there was no transfer of assets by the assessee (dissolved firm) to any person after the dissolution of the firm. That was a case where <ORG> was considering a question of law whether the distribution of assets of a firm consequent on the dissolution amounts to a transfer of assets within the meaning of the expression "otherwise transferred" occurring in Section 34(3) of the Act having regard to the definition of "transfer" in Section 2(47) of the Act. At the outset it may be pointed out that <ORG> in the above decision was not at all considering the impact of the provisions contained in Explanation 3 to Section 43(1) of the Act and the discussion therein was confined to the provisions contained in Sections 34(3) and 2(47) . <ORG> in the course of the judgment said that upon the dissolution the firm ceases to exist ; then follows the making up of accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets takes place inter se between the erstwhile partners by way of mutual adjustment of rights between them. The distribution, division or allotment of assets to the erstwhile partners is not done by the dissolved firm. It was in this sense, <ORG> said that there was no transfer of assets by the assessee to any person. It further said that the distribution of assets did not take place eo instanti with the dissolution of the firm. There may be mutual adjustment of rights between the partners on dissolution of the firm. But that does not mean the Assessing Officer is debarred from ascertaining the "actual cost" of the assets in view of the provisions contained in Explanation 3 to Section 43(1) . The purpose to be served under this provision is totally different. The effectiveness of the provisions cannot be defeated in any manner, even if there is adjustment between the partners of the dissolved firm.

15. We cannot agree with the conclusion of the <ORG> that the revaluation of the assets on the eve of the dissolution of the firm was made bona fide for adjustment of the mutual rights of the firm. This is not a case where there is no written down value, which means, in the case of assets acquired in the previous year, the actual cost to the assessee and in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under the Act as defined under Section 43(6) . Section 43(1) with the Explanations thereto supersedes the general rule of law governing partnership, its assets and dissolution, etc. The definition of "actual cost" contained in Section 43(1) read with the Explanations thereto affords a mechanism by which to reduce the actual cost to a figure which is anything but real. When the asset was formerly used by any other person for the purposes of his business and the main purpose of the transfer of the asset to the assessee is to claim a higher depreciation allowance so as to reduce the liability to pay income-tax, the "actual Cost" shall be determined by the Assessing Officer in the exercise of the power conferred on him as prescribed in Explanation 3 to Section 43(1) no matter what the general law prescribes for determining the cost of the assets on dissolution of partnership firms and transfer of its assets.

16. Both the contesting parties, the assessee as well as the <ORG>, placed reliance on the decision of <ORG> in <CITATION>  113 ITR 616, and the <ORG> said so in its impugned order. That was a case where Section 10(5)(a) of the 1922 Act corresponding to Explanation 3 to Section 43(1) of the present Act came up for discussion. The facts of that case narrated hereunder are more or less similar to the facts on hand. The assessee, a private limited company, was a subsidiary of another private limited company. The object of formation of the assessee-company was to take over some oil and ginning mills, factories and land belonging to and used in its business by the parent company. These assets were taken over by the assessee-company at a cost of Rs. 13,50,000. Their written down value for the parent company was only Rs. 2,21,412 while their original purchase cost to the parent company was Rs. 5,52,475. The assessee paid for the assets by issuing fully paid up shares of that value. The Income-tax Officer applied the proviso to Section 10(5)(a) and, with the previous approval of the Inspecting Assistant Commissioner, he fixed the actual cost of the assets to the assessee at their written down value in the books of the transferor plus the balancing charge arising under Section 10(2)(vii) . The <ORG> rejected the contention of the assessee that the assets had been transferred to the assessee by the parent company after they had been got valued by valuers, because the material on the basis of which the value had been fixed by the valuers for the assets in question had been withheld by the witness who was examined on behalf of the valuers before the Income-tax Officer and the non-production of such material led to an adverse inference being drawn against the assessee-company. On these facts two questions arose for consideration before <ORG> on reference. The first question is whether the proviso to Section 10(5)(a) has been properly applied and the second question is whether the <ORG> is justified in rejecting the valuation and drawing an adverse inference against the assessee. As far as the first question is concerned the court found that the condition for attracting the proviso to Section 10(5)(a) was satisfied because the assets had been used by the parent company for their business before they were transferred to the assessee-company. On the second question the court found that the <ORG> was justified in rejecting the valuation report and drawing an adverse inference against the assessee. The first question alone is relevant in the present case and on that question the court said that the Income-tax Officer proceeded to fix or determine the actual cost (written down value) of the assets transferred by adopting the written down value of those assets transferred in the books of the transferor of the assessee-company as on the date of transfer and added to that figure the balancing charge arising under Section 10(2)(vii) of the Act. The court further observed (page 624) :

"It cannot be disputed that this method, if adopted, would clearly give the actual cost of the assets transferred to the transferor-company as on the date of transfer, and we do not see any reason why if the same value is taken to be the actual cost to the transferree-company, as on the date of transfer, the determination would be irrational or unreasonable. If the Income-tax Officer adopted this method of determining the actual cost of the transferred assets with the approval of the Inspecting Assistant Commissioner it will be difficult to say that the method adopted was unreasonable or irrational."

17. Even if the assessee produces the valuation report, it cannot be said that the above conclusion would be different. Therefore, the drawing of adverse inference against the assessee has no impact on the question decided by the court. The attempt of the <ORG> to distinguish the above decision on the basis that the assessee has furnished the revaluation report in the present case would not fructify.

18. It is a settled position that the court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation, (see <CITATION>  33 ITR 741 ;  1 WLR 464 (HL)). <CITATION> .  63 ITR 609, <ORG> said that the income-tax authorities are entitled to pierce the veil of corporate entity and to look at the reality of the transaction. It further said (page 616) :

"It is true that from the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But in certain exceptional cases the court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade."

19. In this premise it cannot be said that the Assessing Officer has acted unreasonably or arbitrarily in adopting Explanation 3 to Section 43(1) of the Act and fixing the "actual cost" accordingly.

20. As pointed out above, though a large number of questions of law have been framed by the <ORG> for decision, we need answer only the questions referred to by this court in the judgments referred to above. Once we answer these questions specifically, the answers to the other questions would follow. On the common question referred to us in all these references, we answer that the assessee is not entitled to claim depreciation on the assets taken over from the partnership firm at the revalued figure. In other words, the question is answered in the negative, that is to say, in favour of the <ORG> and against the assessee. On the additional question referred to us in I. T. R. Nos. 112 and 113 of 1996, we answer that Explanation 3 to Section 43(1) is attracted to the facts of the present case. That means the question is answered in the affirmative, that is to say, in favour of the <ORG> and against the assessee. The reference cases are disposed of as above.

21. A copy of this judgment under the seal of this court and the Registrar will be sent to <ORG>, Cochin Bench, as required by law.


PETITIONER: <ORG> & <ORG> Vs. RESPONDENT: STATE OF ANDHRA PRADESH & ORS. DATE OF JUDGMENT: 29/09/1967 BENCH: <NAME>, R.S. BENCH: <NAME>, R.S. WANCHOO, K.N. (CJ) <NAME>, V. MITTER, G.K. HEGDE, K.S. CITATION: 1968 AIR 599 1968 SCR (1) 705 CITATOR INFO : F 1969 SC 147 (9,26) R 1969 SC 343 (9) RF 1970 SC1912 (7) RF 1970 SC2000 (11) RF 1972 SC 87 (27,28,29) RF 1974 SC1745 (4) APR 1978 SC 449 (36,37,39,43,52) R 1980 SC 286 (48) MV 1985 SC 679 (27) R 1988 SC1487 (26) R 1989 SC2015 (8) D 1990 SC 781 (28,74,81) R 1990 SC 820 (15,21) ACT: Andhra Pradesh Sugar-cane (Regulation of Supply and Pur- chase) Act 1961 (45 of 1961), s. 21-Validity of section- Purchases of sugar by factories under compulsion of law-Such transactions whether taxable under Entry 54, List II, Seventh Schedule, Constitution of India, 1950-Section 21 of Act 45 of 1961 whether violates Art. 14 of Constitution of India-Whether impedes free trade, commerce and intercourse within the meaning of Art. 301 Constitution of India. HEADNOTE: Under the Andhra Pradesh (Regulation of Supply and Purchase) Act 1961 the occupier of a sugar factory had to buy sugarcane from canegrowers in conformity with the directions of the Cane Commissioner. Under s. 21 of the Act <ORG> had power by notification to tax purchases of sugarcane for use, consumption or sale in a sugar factory. The tax was leviable subject to a maximum rate per metric tonne. The maximum rate for khandsari units was less than that for factories; sugarcane purchased for production of jaggery was not taxed at all. The petitioners were sugar factories in Andhra Pradesh. They filed writ petitions under Art. 32 of the Constitution challenging the validity of s. 21 mainly on the ground that as the petitioners or their agents were compelled by law to buy cane from the canegrowers, their purchases were not made under agreements and were not taxable under Entry 54 List II having regard to <NAME> case. It was further urged that the tax leviable under s. 21 was not truly a purchase tax as it was levied with reference to weight of the goods, that it was levied with reference to use and was therefore a use tax, and that it was the entry of the goods into the factory that was sought to be taxed Articles 14 and 301 of the Constitution were also said to be contravened. Held: (1) There has been a gradual erosion of the laissez faire concept which prevailed in the nineteenth century. It is now realised that in the public interest persons exercising certain callings or having monopoly or near monopoly Powers should sometimes be charged with the duty to serve the public, and if necessary, to enter into contract& The canegrowers scattered in the villages- had no real bargaining power. In the unequal contest between the canegrowers and the factory-owners, the law stepped in and compelled the factory to enter into contracts of purchase of cane offered by the canegrowers on prescribed terms and conditions. [713 C.F.]. Under Act 45 of 1961 and the Rules framed under it, the canegrower in the factory zone is free to make or not to make an offer of sale of cane to the occupier of the factory. But if he makes an offer, the occupier of the factory is bound to accept it. The resulting agreement is recorded in writing and is signed by the parties. The consent of the occupier of the factory is free as defined in s. 14 of the Indian Contract Act . The compulsion of law is not coercion as 706 defined in s. 15 of the Act. The, agreements are enforceable by law and are contracts of sale as defined in s. 4 of the Indian Sale of Goods Act . The purchases of sugarcane under the agreement can be therefore taxed by <ORG> under Entry 54 List II. Section 21 of the Andhra Pradesh Sugarcane (Regulation of Supply and Purchase) Act , 1961 is accordingly not ultra vires. [712 F-H]. <CITATION> .  S.C.R. 379 and <CITATION> ,  Supp. 2 S.C.R. 459, distinguished and explained. Lane v. <NAME>, 1 Ld. Raym 646:91 E.R. 17, Kirkness v. <ORG>  A.C. 696 and Ridge Nominees v. I.R.C.  2 W.L.R. 3, referred to. <CITATION> ,  1 S.C.R. 479, relied on. (ii) Purchase tax need not always be levied with reference to price of goods or with reference to turnover. It may be levied on the occupier of a factory by reference to the weight of the goods purchased by him. [717 C-E]. It cannot he accepted that a purchase tax must be always levied on goods generally and never with reference to their use, consumption or sale. Under List II Entry 54 <ORG> is not bound to levy a tax on all purchases of cane. It may levy a tax on purchases of cane required for use, consumption or sale in a factory. The tax so levied is not a use tax. [717 F-718 B]. <CITATION> . 322 U.S. 327: 88 L. Ed. 1305 and <CITATION> , A.I.R. 1953 Mad. 116, referred to. The tax under s. 21 is not a levy on the (entry of goods into the factory. Cane cultivated by the factory and entering it cannot be taxed under the section. [718 G]. <CITATION> .,  3 S.C.R. 242, referred to. (iii) Section 21 does not impede free trade, commerce and intercourse and therefore does not offend Art. 301 of the Constitution. The tax levied under s. 21 does not discriminate against any imported cane. [719 E-720 A]. A. T. Mehtab Majid and Co. v. State of Madras,  Supp. 2 S.C.R. 435, <CITATION> :

( <CITATION> ,  1 S.C.R. 491, referred to.

(iv) The differential treatment of factories producing sugar by means of vacuum pans, khandsari units producing sugar by the open pan process and canegrowers using cane for the manufacture of jaggery is reasonable and has a rational relation to the object of the Act. There is thus no violation of Art. 14 of the Constitution. [720 G-H]. Nor does discrimination result from the exemption under s. 21(3) of factories which are new or which in the opinion of the <ORG> have substantially expanded. The exemption is based on legitimate legislative policy. The question whether the exemption should be granted to a factory and if so for what period and the question whether a factory has substantially expanded and if so the extent of such expansion have to be decided with reference to the facts of each individual case. It is not possible for <ORG> to examine the merits of individual cases and the function was properly delegated to the State <ORG>. The legislature was not obliged to prescribe a more rigid standard for the guidance of <ORG>. [721 A-C].

& ORIGINAL JURISDICTION: Writ Petitions Nos. 53, 100, 101, 105 and 106 of 1967.

Petitions under Art. 32 of the Constitution of India for the enforcement of the fundamental rights.

<NAME>, <NAME>, <NAME> and <NAME>, for the petitioners (in W. P. No. 53 of 1967).

<NAME>, <NAME>, <NAME> and <NAME>, for the petitioners (in W.P. No. 100 of 1967).

<NAME>, <NAME> and, <NAME>, for the petitioners (in W.P. No.101 of 1967). <NAME> and <NAME>, for the peti- tioners (in W.P. Nos. 105 and 106 of 1967).

<NAME>, Attorney-General and <NAME>, for he respondents (in W.P. No. 53 of 1967).

<NAME> and <NAME>, for the, respondents (in V. Ps. No. 100, 101, 105 and 106 of 1967).

<NAME>, <NAME> and <NAME>, for the intervener (in W.P. No. 53 of 1967).

The Judgment of the Court was delivered by-- <NAME>, <NAME> In all these writ petitions under Art. 32 of the the petitioners ask for an order declaring that s. 21 of the Andhra Pradesh Sugarcane (Regulation of Supply and Purchase) Act , 1961 (Andhra Pradesh Act No. 45 of 1961) is unconstitutional and ultra vires and a direction prohibiting the respondents from levying tax under S. 21 and to refund the tax already collected. Section 21 of the Act is in these terms:

"21(1) The Government may, by notification, levy a tax at such rate not exceeding five rupees per metric tonne as may be prescribed on the purchase of cane required for use, consumption or sale in a factory.

(2) The Government may, by notification, remit in whole or in part such tax in respect of cane used, or intended to be used in a factory for any purpose specified in such notification.

(3) The Government may, by notification, exempt from the payment of tax under this section--

(a) any new factory which, in the opinion of the Government has substantially expanded, to the extent of such expansion, for a period not exceeding two years from the date of completion of the expansion.

P(N)7SCI--6 (4) The tax payable under sub-section (1) shall be levied and collected from the occupier of the factory in such manner and by such authority as may be prescribed.

(5) Arrears of tax shall carry interest at the rate of nine per cent per annum.

(6) If the tax under this section together with the interest, if any, due thereon, is not paid by the occupier of a factory within the prescribed time, it shall be recoverable from him as an arrear of land revenue."

Section 2(1) defines a factory which means "any premises including the precincts thereof, wherein twenty or more workers are working or were working on any day during the preceding twelve months and in any part of which any manufacturing process connected with the production of sugar by means of vacuum pans in being carried on or is ordinarily carried on with the aid of mechanical power. Section 2(m) defines the occupier of a factory. B:

Ordinance No. 1 of 1967 which was replaced by Act No. 4 on 1967, the following new sub-

section (I-A) was inserted and other consequential amendments were made in S. 21 of the principal Act "(1-A) The Government may, by notification, levy a tax at such rate, not exceeding three. rupees and fifty paise per metric tonne, as may be prescribed on the purchase of cane required for use, consumption or sale in a khandsari unit".

Also the following sub-sections (kk) and (kkk) were inserted in s. 2 of the principal Act:

"(kk) 'khandasari sugar' means sugar produced by open-pan process in a khandasari unit from sugarcane juice, or from rab or gur or both, containing more than eighty per cent sucrose; (kkk) 'khandasari unit' means a unit engaged or ordinarily engaged in the manufacture of khandasari sugar and includes a bel;"

It may be mentioned that sales and purchases of sugarcane a exempt from tax under the Andhra Pradesh General Sales Tax Act, 1957. The petitioners own sugar factories as defined in 2(1). Their agents are the occupiers of the factories as defined in S. 2(m) . They purchased cane from canegrowers within their respective factory zones. The State Government had issued notifications levying tax under s. 21 . For the last several years the petitioners have paid the tax on their purchases of sugarcane and further demands are being made on them for payment of the tax They challenge the vires and the , constitutionality of S. 21 of various grounds. The principal submissions were made by <NAME> who  and his arguments were adopted by counsel appearing in the other petitions. Mr. <NAME> who appeared in Writ Petition No. 100 of 1967 raised a few additional contentions.

The submission of Mr. <NAME> is that s. 21 so far as it levies a tax on the purchases of sugarcane by or on behalf of the petitioners from the canegrowers in their respective factory zones is ultra vires the powers of the legislature under Entry No. 54, List 11, Sch. VII of the Constitution in the light of the decision in <CITATION> .(1). Now, in <NAME> case(1), the actual decision was that the legislature had no power under List II, Entry 48, Sch. VII of the Government of India Act, 1935 to impose a tax on the supply of materials under an entire and indivisible contract for construction of buildings. But the Court also held that the phrase "sale of goods" in the Entry must be interpreted in the legal sense which it had in the Indian Sale of Goods Act , that <ORG> had no power to tax a transaction which was not a sale of goods in that sense and that in order to constitute a sale there must be an agreement for sale of goods for a price and the passing of property therein pursuant to such an agreement. <NAME>, J. laid at pp. 397-398:

"Thus, according to the law both of England and of India, in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods which of course presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods. Unless all these elements are present, there can be no sale." in the light of this decision, the expression "sale of goods" in Entry 54, List II, Sch. VII of the Constitution must be given the ame interpretation. On a parity of reasoning, to constitute a purchase of goods" within this Entry, there must be an agreement for purchase of goods and the passing of property therein pursuant to such an agreement. The question, therefore, is whether the purchases by or on behalf of the petitioners from the cane- growers in their respective factory zones were made under agreements of purchase and, sale.

It appears that the Cane Commissioner is empowered under s.15 of Act No. 45 of 1961 to declare any area as the factory one for the purpose of supply of cane to a factory during a particular crushing season. Under S. 16(1) , on the declaration of the factory zone the occupier of the factory is bound to purchase such quantity of cane grown in that area and offered for sale to the factory (1)  S.C.R. 379.

as may be determined by the Cane Commissioner in accordance with the provisions of the schedule. Section 16(2) prohibits the the canegrowers in a factory zone from supplying or selling cane to any factory or other person otherwise than in accordance with the provisions of the schedule. Section 28(2)(1) empowers the <ORG> to make rules providing for the form of agreement to be entered into under the provisions of the Act. Rule 20 of the Andhra Pradesh Sugarcane (Regulation of Supply and Purchase) Rules, 1951 framed under the Act provides that a canegrower or a canegrower's co-operative society may within 14 days of the order declaring an area as the factory zone or such extended time as may be fixed by the Cane Commissioner, offer in Form No. 2 to supply cane grown in that area to the occupier of the factory and such occupier of the factory within 14 days of the receipt of the offer shall enter into an agreement in Form No. 3 or Form No. 4 with the canegrower or the canegrower's co-operative society as the case may be for the purchase of the cane offered. Form No. 3 is the statutory form of agreement with a canegrower. By the agreement in Form No. 3 the occupier of the factory agrees to buy and the canegrower agrees to sell during the crushing season certain sugarcane crop grown in the area at the minimum price noticed by the <ORG> from time to time upon the terms and conditions mentioned in the agreement. The agreement contains an arbitration clause and is signed by or on behalf of the occupier of the factory and the canegrower. The agreement in Form No. 4 with a canegrower's co-operative society is on the same lines. All the terms and conditions of the agreements and the mode of their performance are fixed and regulated by the Act, the Rules and orders made under the Act. Contravention of the provisions of the Act or of any rule or order made under the Act is punishable under S. 23 . The minimum price of sugarcane is fixed under the Sugarcane Control Order, 1966. The learned Attorney and Mr. <NAME> attempted to argue that the occupier of the factory has some option of not buying from the canegrower and some freedom of bargaining about the terms and con- ditions of the agreements. But after having read all the relevant provisions of the Act and the Rules, they did not pursue this point. We are satisfied that under the provisions of Act No. 45 of 1961 And the Rules framed thereunder, a canegrower in a factory zone is free to sell or not to sell his sugarcane to the factory. He may consume it or may process it into jaggery and then sell the finished product. But if he offers to sell his cane, the occupier of the factory is bound to enter into an agreement with him on the prescribed terms and conditions and to buy cane pursuant to he agreement in conformity with the instructions issued by the Cane Commissioner. The submission of the petitioners is that as ,hey or their agents are compelled by law to buy cane from the canegrowers their purchases are not made under agreements and are not taxable under Entry No. 54, List 11 having regard to <NAME> case(1). This contention requires close examination.

Under s. 4(1) of the Indian Sale of Goods Act, 1930, a con- tract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. By s. 3 of this Act, the provisions of the Indian Contract Act , 1872 apply to contracts of sale of goods save in so far as they are inconsistent with the express provisions of the later Act. Section 2 of the Indian Contract Act provides that when one person signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of the other to such act or abstinence, he is said to make a proposal. When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise. Every promise and every set of promises forming the consideration for each other is an agreement. There is mutual assent to the proposal when the proposal is accepted and in the result an agreement is formed. Under S. 10 , all agreements are contracts if they are made by the free consent of parties competent to contract for a lawful consideration and with a lawful object and are not by the Act expressly declared to be void,. Sec- tion 13 defines consent. Two or more persons are said to consent when they agree upon the same thing in the same sense. Section 14 defines free consent. Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake as defined in ss. 15 to

22. Now, under Act No. 45 of 1961 and the Rules framed under it, the canegrower in the factory zone is free to make or not to make an offer of sale of cane to the occupier of the factory. But if he makes an offer, the occupier of the factory is bound to accept it. The resulting agreement is recorded in writing and is signed by the parties. The consent of the occupier of the factory to the agreement is not caused by coercion, undue influence, fraud, mis- representation or mistake. His consent is free as defined in s. 14 of the Indian Contract Act though he is obliged by law to enter into the agreement. The compulsion of law is not coercion as defined in S. 15 of the Act. In spite of the compulsion, the agreement is neither void nor voidable. In the eye of the law, the agreement is freely made. The parties are competent to contract The agreement is made for a lawful consideration and with a lawful object and is not void under any provisions of law. The agreements are enforceable by law and are contracts of sale of sugarcane as defined in S. 4 of the Indian Sale of Goods Act. The purchases of sugarcane under the agreement can be taxed by the State legislature under Entry 54, List 11. (1)  S.C.R. 379.

Long ago in 1702, <NAME>, C.J. said in <NAME> v. Cotton(1):

"When a man takes upon himself a public employment, he is bound to serve the public as far as this employment goes, or an action lies against him for refusing."

The doctrine that one who takes up a public employment is bound to serve the public was applied to innkeepers and common carriers. Without lawful excuse, an innkeeper cannot refuse to receive guests at his inn, and a common carrier cannot refuse to accept goods offered to him for carriage. See Halsbury's Laws of England, 3rd Edn., Vol. 4, art. 375 and Vol. 21, art. 938. A more general application of the doctrine was arrested by the growth of the principle of laissez faire which had its heyday in the. midnineteenth century. Thereafter, there has been a gradual erosion of the laissez faire concept. It is now realised that in the public interest, persons exercising certain callings or having monopoly or near monopoly powers should sometimes be charged with the duty to serve the public, and, if necessary, to enter into contracts. Thus, S. 66 of the Indian Railways Act, 1890 compels the railway administration to supply the public with tickets for travelling on the railway upon payment of the usual fare. Section 22 of the Indian Electricity Act, 1910 compels a licensee to supply electrical energy to every person in the area of supply on the usual terms and conditions. <NAME> and Fifoot in their Law of Contract, 6th Edn., p. 23 observe that for reasons of social security the <ORG> may compel persons to make contracts. One of the objects of Act No. 45 of 1961 is to regulate the purchase of sugarcane by the factory owners from the canegrowers. The canegrowers scattered in the villages had no real bargaining power. The factory owners or their combines enjoyed a near monopoly of buying and could dictate their own terms. In this unequal contest between the canegrowers and, the factory owners, the law stepped in and compelled the factory to enter into contracts of purchase of cane offered by the canegrowers on prescribed terms and conditions.

<CITATION> (2), the <ORG> held that. sales of steel products authorised by the Controller under cls. 4 and 5 of the Iron and Steel (Control of Production and Distribution) Order, 1941 were eligible to tax under Entry 54, List 11. The <ORG> found that the parties had entered into contracts of sale though in view of the Order the area of bargaining between the buyer and the seller was greatly reduced. <NAME>, J. speaking for the <ORG> said that as a result of economic compulsions and changes in of the political outlook the freedom to contract was now being confined gradually to narrower and narrower limits. We have here a case where one party (1), 1 Ld. Raym. 646: 91 E.R. 17 (2)  1 S.C.R. 479.

to a contract of sale is compelled to enter into it on rigidly prescribed terms and conditions and has no freedom of bargaining. But the contract, nonetheless, is a contract of sale.

In <NAME> v. <ORG>,(1) <ORG> by a majority held that a compulsory vesting of title of the company's railway wagons in <ORG> under s. 29 of the Transport Act, 1947 was not a sale within the meaning of the phrase "is sold" in S. 17 of the Income- tax Act, 1945. Under S. 29 , there was a compulsory taking of property. The assent of the company to the taking was not required by statute. By force of law, the property of the company was taken without its assent. There was no offer, no acceptance and no mutual assent and no contract resulted. <ORG> held that mutual assent was an element of a transaction of sale. In <NAME> case(1), the <ORG> approved of this principle and rejected the argument of counsel that an involuntary transfer of title as in <NAME>'s case(2) was a sale within the meaning of the legislative Entry. But the <ORG> did not say that if one party was free to make an offer of sale and the other party was obliged by law to accept it and to enter into an agreement for purchase of the goods, a contract of sale did not result. In the present case, the seller makes an offer and the buyer accepts it. The parties then execute and sign an agreement in writing. There is mutual assent and a valid contract, though the assent of the buyer is given under compulsion of statute. <NAME> relied on the following passage in the Law of Contract by <NAME>, at p. 5: "Where the legislation leaves no choice at all to one party, the transaction is not a contract." But the author does not cite any authority in support of the proposition., He adds that even a compulsory disposition of property may be treated as contract for the purpose of a particular statute and cites the case of <ORG> v. <NAME>). There, the <ORG> distinguishing <NAME>'s case(3) held that the compulsory transfer of shares of a dissenting shareholder by a person "authorised to make the transfer on his behalf under s. 209 of the Companies Act, 1948 corresponding to S. 395 of our Companies Act , 1956 was having regard to the machinery created by the section a conveyance on sale within s. 54 of the Stamp Act, 1 91. The Lord Justices gave separate opinions. It is worthwhile quoting the opinion of <ORG> who said:-

"When the legislature, by section 209 of the Companies Act, 1948, empowers the transferee company to appoint an agent on behalf of a dissenting shareholder for the purpose of executing a transfer of his shares (1)  A.C. 696.

(2) [1959] S.C.R. 379.

(3) [1962] 2 W.L.R. 3.

against a price to be paid to the transferor company and held in trust for the dissenting shareholder, it is clearly ignoring his dissent and putting him in the same position as if he had assented. For the purpose of considering whether this results in a sale, one must, I think, bear that situation in mind, and regard, the dissent of the shareholder as overridden by an assent which the statute imposes upon him, fictional though this may be. Thus. in the context of section 209 the transfer becomes in law a conveyance on sale. This conclusion, in my opinion, does not run counter to what was said in <ORG> in Kirkness (Inspector of Taxes) v. <ORG>,(1), where, in terms of the statute there under consideration, property belonging to other persons was declared to vest on a specified date in <ORG> against payment of compensation. This may be no more than a difference of machinery, but machinery may make the very difference between a sale and a mere expropriation against compensation. "Lord <NAME>, I venture to think, implies as much when he says he gets no assistance from the cases decided under the Stamp Act s." <CITATION> (2), the <ORG> by a majority held that the supply of sugar by a sugar factory to a Provincial Government in obedience to the directions of the Sugar Controller given under the Sugar and Sugar Products Control Order, 1946 was not a sale taxable under List II, Entry 48, Sch. VII of the Government of India Act, 1935. Mr. <NAME> placed strong reliance on the fol- lowing passage in the judgment of <NAME>, J. at pp. 469-470:

"A contract of sale between the parties is therefore a pre-requisite to a sale. The transactions of despatches of sugar by the assessees pursuant to the directions of the Controller were not the result of any such contract of sale. It is common ground that the Province of Madras intimated its requirements of sugar to the Controller, and the Controller called upon the manufacturing units to supply the whole or part of the requirement to the Province. In calling upon the manufacturing units to supply sugar, the Controller did not act as an agent of the <ORG> to purchase goods: he acted in exercise of his statutory authority. There was mani- festly no offer to purchase sugar by the Province, and no acceptance of any offer by the manufacturer. The manufacturer was under the Control Order left no volition: he could not decline to carry out the order; if he (1) [1955] A.C. 696.

(2) [1963] Supp. 2 S.C.R. 459, 469.

did so he was liable to be punished for breach of the order and his goods were liable to be forefeited. <ORG> and the manufacturer had no opportunity to negotiate, and sugar was despatched pursuant to the direction of the Controller and not in acceptance of any offer by the Government."

Divorced from the context, this passage gives some support to the contention that there can be no contract if the acceptance of the offer is made under compulsion of a direction given by a statutory authority. But the passage must be read with the facts of the case. By cl. 3 of the Sugar and Sugar Products Control Order, 1946, producers of sugar were prohibited from disposing of sugar except to persons specially authorised in that behalf by the Controller to acquire sugar on behalf of certain <ORG>s. Clause 5 required every producer or dealer to comply with the directions issued by the Controller regarding production, sales, stocks and distribution of sugar. Clause 6 authorised the Controller to fix the price of sugar. Clause 7(1) authorised the Controller to allot quotas of sugar for any Province and to issue directions to any producer or dealer for the supply of the sugar specifying the price, quantity and type or grade of the sugar and the time and manner of supply. Contravention of the directions entailed forfeiture of stocks under cl. 11 of the Order and was punishable under r. 81(4) of the Defence of India Rules, 1939. The admitted course of dealings between the parties was that the <ORG>s of the consuming States used to intimate to the Sugar Controller their requirement of sugar and the factory owners used to send to him statements of their stocks of sugar. On a consideration of the requisitions and the statements of stock, the Controller used to make allotments. The allotment order used to be addressed by the Controller to the factory owner, directing him to supply sugar to the <ORG> in question in accordance with the latter's despatch instructions. A copy of the allotment order used simultaneously to be sent to the <ORG> concerned and the latter then used to send to the factory detailed despatching instructions.. In these circumstances, <NAME> and <NAME>, J<NAME> (<NAME>, <NAME> dissenting) held that by giving intimation of its requirement of sugar to the Controller and applying for allotment of sugar, <ORG> did not make any offer to the manufacturer. The direction of the Controller to the manufacturer to supply sugar to the <ORG> was given in the exercise of his statutory authority and was not the communication of any offer made by the <ORG>. The despatch of the goods in compliance with the directions of the Controller was not the acceptance by the manufacturer of any offer, nor could it be deemed to be an offer by the manufacturer to supply goods. On the, special facts of that case, the majority decision was that there was no offer and acceptance and no contract resulted. That decision should not be treated as an authority for the proposition that there can be no contract of sale under compulsion of a statute. It depends upon the facts of each case and the terms of the particular statute regulating the dealings whether the parties have entered into a contract of sale of goods. Under Act No. 45 of 1961, a canegrower makes an offer to the occupier of the factory directly and the latter accepts the offer. The parties then make and sign an agreement in writing. There is thus a direct privily of contract between the parties. The contract is a contract of sale and pur- chase of cane, though the buyer is obliged to give his assent under compulsion of a statute. <ORG> is competent to tax purchases of canes made under such a contract.

Mr. <NAME> submitted that there-can be no levy of a pur- chase tax with reference to the tonnage of the cane. We cannot accept this contention. Usually the purchase tax is levied with reference to the price of the goods. But the legislature is competent to levy the tax with reference to the weight of the goods purchased.

The contention of Mr. <NAME> that a purchase tax must be levied with reference to the turnover only is equally devoid of merit. Where the purchase tax is levied on a dealer, the levy is usually with reference to his turnover, which normally means the aggregate of the amounts of purchase prices. But the tax need not necessarily be levied on a dealer or by reference to his turnover. It may be levied on the occupier of a factory by reference to the weight of the goods purchased by him.

Mr. <NAME> next submitted that a purchase tax must be levied on goods generally, and there can be no purchase tax with reference to their subsequent use, consumption or sale. He based his argument on paragraphs 17 to 20. Chap. III, Vol. III of the Report of the Taxation Enquiry <ORG>. There, the <ORG> while discussing the comparative merits of sales tax in relation to customs, excise and octroi, pointed out that sales tax was a major source of revenue and could be applied to the generality of goods, while customs, excise and octroi could be applied to only a limited portion of the industrial output of the country. The <ORG> did not express any opinion on the scope of List II, Entry 54. Under that Entry, the State legislature is not bound to levy a tax on all purchases of cane. It may levy a tax on purchases of cane required for use, consumption or sale in a factory. The legislature is competent to tax and also to exempt from payment of tax sales or purchases of goods required for specific purposes. Other instances of special treatment of goods required for particular purposes may be given. Section 6 and Sch. 1, item 23 of the Bombay Sales Tax Act, 1946 levy tax on fabrics and articles for personal wear. Section 2(j)(a)(ii) of the C.P and Berar Sales Tax Act, 1947 exempts sales of goods intended for use by a registered dealer as raw materials for the manufacture of goods.

Mr. <NAME> submitted that the tax levied under s. 21 was a use tax and referred to <CITATION> .(1) and <ORG> The State of Madras(2). He argued that the State legislature could not levy a use tax which was essentially different from a purchase tax. The assumption of counsel that S. 21 levies a use tax is not well-founded. The taxable event under S. 21 is the purchase of goods and not the use or enjoyment of what is purchased. The constitutional implication of a use tax in American law is entirely irrelevant. The observation in the Madras case that the Explanation to Art. 286(1)(a) of the Constitution conferred, a power on the State legislature to levy a use tax is erroneous. The Explanation fixed the situs of certain sales. It did not confer upon the legislature any power to levy a use tax.

To appreciate another argument of Mr. <NAME>, it is necessary to refer to a few facts. It appears that paragraph 21 of the Bill published in the <ORG> on March 3, 1960 preliminary to the passing of Act No. 45 of 1961 provided for a levy of a cess on the entry of cane into the premises of a factory for use, consumption or sale therein. On December 13, 1960, this <ORG> in <CITATION> (3) struck down a similar provision in the U.P. Sugarcane Cess Act, 1956 on the ground that the State legislature was not competent to enact it under Entry 52, List II as the premises of a factory was not a local area within the meaning of the Entry. Having regard to this decision, paragraph 21 of the Bill was amended and s. 21 in its present form was passed by <ORG>. The Act was published in the <ORG> on December 30, 1961. Mr. <NAME> submitted that in this context the levy under s. 21 was really a levy on the entry of goods into a factory for consumption, use or sale therein. We are unable to accept this contention. As the proposed tax on the entry of goods into a factory was unconstitutional, paragraph 21 of the original Bill was amended and s. 21 in its present form was enacted. The tax purchase of goods. The taxable event is the purchase of cane for use, consumption or sale in a factory and not the entry of cane into a factory. As the tax is not on the entry of the cane into a factory, it is not payable on cane cultivated by the factory and entering the factory premises.

Mr. <NAME> submitted that s. 21 impeded free trade, com- merce and intercourse and offended Art. 301 of the Constitu- tion and relied on the decision in Firm A. T. Mehtab Majid & (1) 322 U.S. 327: 88 L. Ed. 1305.

(2) A.I.R. 1953 Mad. 116, 127-128, (3) [1961] 3 S.C.R. 242.

<CITATION> (1). In that case, the <ORG> held that r. 16(2) of the Madras General Sales Tax (Turnover and Assessment) Rules, 1939 discriminated against imported hides or skins which had been purchased or tanned outside the State by levying a higher tax on them and contravened Art. 304(a) of the Constitution. At p. 442, <NAME> J. said:

"It is therefore now well settled that taxing laws can be restrictions on trade, commerce and intercourse, if they hamper the flow of trade and if they are not what can be termed to be compensatory taxes or regulatory measures. Sales tax of the kind under consi- deration here, cannot be said to be a measure regulating any trade or a, compensatory tax levied for the use of trading facilities. Sales tax, which has the effect of discriminating between goods of one State and goods of another, may affect the free flow of trade and it will then offend against Art. 301 and will be valid only if it comes within the terms of Art. 304(a)."

That case decides that a sales tax which discriminates against goods imported from other States may impede the free flow of trade and is then invalid unless protected by Art. 304(a). But the tax levied under S. 21 does not discriminate against any imported cane. Under S. 21 , the same rate of tax is levied on purchases of all cane required for use, consumption or sale in a factory. There is no discrimination between cane grown in the State and cane imported from outside. As a matter of fact, under the Act the factory can normally buy only cane grown in the factory zone. A non-discriminatory tax on goods does not offend Art. 301 unless it directly impedes the free movement or transport of the goods. <CITATION> (2). <NAME>, J. speaking for the majority said:

"We are, therefore, satisfied that in determining the limits of the width and amplitude of the freedom guaranteed by Art. 301 a rational and workable test to apply would be: Does the impugned restriction ope- rate directly or immediately on trade or its movement?. It is the free movement of the transport of goods from one part of the country to the other that is intended to be saved, and if any Act imposes any direct res- trictions on the very movement of such goods it attracts the provisions of Art. 301 , and its validity can be sustained only if it satisfies the requirements of Art. 302 or Art. 304 of Part XIII."

(1) [1963] Supp. 2 S.C.R. 435.

(2) [1961] 1 S.C.R. 809, 860-861.

<NAME>

This interpretation of Art. 301 Was not dissented from in <CITATION> (1). Normally, a tax on sale of goods does not directly impede the free movement or transport of goods. Section 21 is no exception. It does not impede the free movement or transport of goods and is not violative of Art.

301. Mr. <NAME> next submitted that s. 21 offended Art. 14 of the Constitution in several ways. It was argued that s. 21 read with s. 2(e) discriminated between producers of sugar using the vacuum pan and open pan processes. Under s. 2  1 , as it stood before its amendment by Act No. 4 of 1967 tax was levied on purchases of cane by factories producing sugar by means of vacuum pans but purchases of cane by khandasari units producing khandasari sugar by the open pan process were entirely exempt from the tax. Even the amended s. 21 levies a lower rate of tax on the purchases of cane by khandsari units. It was also argued that there was discrimination in favour of producers of jaggery by exempting their purchases of cane from payment of the tax. But the affidavits filed on behalf of the respondents show that factories producing sugar by means of vacuum pans and khandasari units producing sugar by the open pan processes form distinct and separate classes. The industry using the vacuum pan process is in existence since 1932-33. No tax was levied on this industry until 1949. In 1949 when the industry became well established, tax was levied on it for the first time by s. 14 of the Madras Sugar Factories Control Act, 1949. The khandasari units carry on a small scale industry. They are of recent origin in the State of Andhra Pradesh. Until 1967, this industry was exempt from the levy. When the industry came to be somewhat established by 1967 a smaller rate of tax was levied on it. In 1965-66, factories adopting the vacuum pan process bought over 32 lakh tonnes of cane while the khandasari sugar units in the State bought about 2.70 lakh tonnes of cane. The manufacture of jaggery has no resemblance to the manufacture of sugar by the vacuum pan or the open pan system. It is a cottage industry wherein individual canegrowers process their cane into jaggery and market it as a finished product. Having regard to the affidavits, we are satisfied that the differential treatment of the factories producing sugar by means of vacuum pans, khandasari units producing sugar by. the open pan process and cane growers using cane for the manufacture of jaggery is reasonable and has a rational relation to the object of taxation. There are marked differences between the three classes of users of cane and their capacity to pay the tax. The legislature could reasonably treat the three sets of users of cane differently for purposes of levy.

(1) [1963] 1 S.C.R. 491, 533.

It was next argued that the power under s. 21(3) to exempt new factories and factories which in the opinion of the Government have substantially expanded was discriminatory and violative of Art. 14. We are unable to accept this contention. The establishment of new factories and the expansion of the existing factories need encouragement and incentives. The exemption in favour of new and expanding factories is based on legitimate legislative policy. The question whether the exemption should be granted to any factory, and if so, for what period and the question whether any factory has substantially expanded and if so, the extent of such expansion have to be decided with reference to the facts of each individual case. Obviously, it is not possible for the State legislature to examine the merits of individual cases and the function was properly delegated to <ORG>. The legislature was not obliged to prescribe a more rigid standard for the guidance of the Government. We hold that S. 21 does not violate Art. 14. The petitioner in Writ Petition No. 101 of 1967 raised the contention that it was a new factory and that <ORG> should have exempted it from payment of tax under s. 21(3)(a) . The contention was controverted by the respondents. The affidavits do not give sufficient materials on the point, nor is there any prayer in the petition for the issue of a mandamus directing <ORG> to grant the exemption. In the circumstances, we do not think it fit to express any opinion on the matter. It will be open to the petitioner in Writ Petition No. 101 of 1967 to raise this contention in other proceedings. In the result, the petitions are dismissed with costs, one hearing fee.

G.C. Petitions dismissed.


ORDER <NAME>, J.

1. By a lease deed Flat No. B of Civil center, Unit I situate at dated September 1, 1970 <ORG>. Kalinga Bapuji Nagar Kajpath, Bhubaneshwar, <ORG>, Bhubaneshwar, Orissa, a admeasuring 116 feet x 100 feet together with partnership firm leased land comprised in a service station standing thereon from Government of Orissa Drawing No. C-311, October 1, 1969 for a period of 10 years renewable and determinable as provided in the lease deed. The Caltex (Acquisition of Shares of <ORG> and of the Undertakings in India of <ORG>, 1977 [hereinafter referred to as 'the Act'] was enacted by <ORG> and pursuant to which <ORG> <ORG> was taken over by the Government of India and was amalgamated with the petitioner-Corporation by an order made on May 9, 1978. Section 7(1) of the Act provided that the rights arising under leases obtained by <ORG> would vest in the Central Government. Section 7(3) of the Act specifically provided that on the expiry of the term of any lease, if so desired by the Central Government, be renewed or continued, so far as may be, on the same terms and conditions on which the lease was originally granted or entered into. The Amalgamation Order provided in Clause 5 thereof savings of contract etc. entered into by <ORG>. <ORG> as they would be subsisting or having effect immediately before the appointed day be of as full force and effect in favour of the appellant and may be enforceable fully and effectually as if the appellant had been a party thereto or as if it had been executed in favour of the appellant.

2. By a letter dated May 23, 1979 the appellant exercised the option of renewal of the lease for a further term of 10 years from the expiration of the present tenure of the lease in question. Thereafter, on September 13, 1989, the appellant wrote to the respondent that in terms of Section 5 and Section 7(3) of the Act they exercised their right to renew the lease for a further period of 20 years commencing from October 1, 1989 on the same terms and conditions on which the lease dated September 1, 1970 held the lease immediately before 1977. On March 23, 1993 the respondent filed a petition under Article 226 of the Constitution for quashing of the said notice of renewal dated September 13, 1989. Before <ORG> the respondent contended as under:-

(i) that no deed has been executed renewing the lease on its expiry on September 30, 1979 and, therefore, the appellant could not exercise any further option of renewal and the notice of renewal, to which we have adverted to earlier, dated September 13, 1989 sent by the respondent is without jurisdiction and the appellant is a trespasser;

(ii) that even if the appellant had a statutory right of renewal the same could be availed of only once and there could be no further renewal subsequent to 1989;

(iii) that in terms of the enactment the right of renewal has to be exercised when desired by <ORG> and <ORG> having not desired in the present case it is not open to the appellant to exercise that right;

(iv) that in view of enormous escalation of prices of land in the city of Bhubaneshwar it is an arbitrary and inequitable act on the part of the appellant to occupy the premises at a meagre rent of Rs. 1900/- per month; and

(v) that the respondent's offer to be appointed as an agent under the <ORG> should have been acceded to and not to appoint illegally another agent.

On behalf of the appellants it was contended before <ORG> that even in the absence of a deed the right of renewal could be exercised in accordance with the original terms contained in the lease deed and thus the appellant has a right to ask for a further renewal of 20 years and the notice of renewal cannot be stated to be illegal or arbitrary. The validity of the Act or any provision thereof not being in question and as the object of the Act is distribution of petroleum products which is in public interest and, therefore, such power could be exercised under the Act. However, it was made clear that the appellant is willing to enhance the rent subject to the condition of the lessor agreeing to renew the lease for a further period of 20 years.

3. <ORG> held that the appellant having replaced <ORG> in the terms of the Act and the Amalgamation Order while the original lease was subsisting and after expiry of the lease no fresh deed having been executed between the parties, Clause 3(g) of the lease deed was not acted upon and, therefore, the appellant cannot enforce a second renewal after the renewed term of 10 years which expired in 1989. The object of Sections 5(2) and 7(3) of the Act being to give some breathing time, these provisions contemplate renewal of a lease for one term and, therefore, the appellant was not entitled to exercise any option for a further period after the renewed term of 10 years expired in 1989 and consequently the communication dated September 13, 1989 was without jurisdiction and such a power was not available to the appellants. The contention that <ORG> not having expressed its desire was not accepted by <ORG> on the view that the appellants could not hold the lease subsequent to 1989 and, therefore, the position of the appellant was that of a trespasser and is, therefore, bound to pay damages at the rate of Rs. 5 thousand per month and thus accepted that contention also. <ORG> further took the view that if the respondent is desirous of continuing the sale of petroleum, there was no justification on the part of the <ORG> to engage another person and forcibly occupy the premises.

4. Ultimately, <ORG> issued the following directions:-

(i) The impugned letter of <ORG> is quashed as the Corporation does not have the power to exercise option for any further renewal after expiry of the renewed period in 1989;

(ii) The said <ORG> should deliver the vacant possession of the premises in question to the petitioner;

(iii) Subsequent to 30.9.1989, the date on which the renewed period of ten years expired, the <ORG> would be liable to pay the petitioner at the rate of Rs. 5,000/-(five thousand) per month till vacating the, premises in question in favour of the petitioner;

(iv) It would be open for the <ORG> to negotiate with the petitioner and if the petitioner agrees, to appoint the petitioner as an agent of <ORG> for continuing the petrol pump in question.

This order is in appeal before us. This <ORG> on September 9, 1993, while directing issue notice, . granted interim stay which was continued by another order made on November 1, 1993 and status quo was ordered to be maintained by another order dated July 14, 1997 and that condition continues till today.

5. <NAME>, learned senior advocate for the appellants, contended:-

(i) firstly, that the letter exercising the option to renew the lease in terms of Sections 5 and 7(3) of the Act was sent on September 13, 1989 and the writ petition was filed before <ORG> on March 23, 1993 and in the absence of any explanation for the delay in approaching the Court, <ORG> . ought to have dismissed the petition on the ground of laches alone;

(ii) secondly, that the writ petition was not an appropriate remedy inasmuch as disputed questions of fact as to (a) whether the original lease was renewed or not and in what manner the same had to be renewed,

(b) whether by a deed or otherwise and the effect thereof, and (c) whether the payment of damages or mesne profits would really arise;

(iii) thirdly, that the invocation of the jurisdiction of <ORG> in a contractual matter between two private parties though having a statutory flavour or adjudication of the rights thereto is clearly an abuse of the process of the court; and

(iv) lastly, that the lease entered into originally with <ORG> on September 1, 1970 enabled the appellant to obtain an aggregate of two renewals each of ten years and that provision read with statutory provisions of Section 5 and 7 of the Act would enable the appellants to exercise such option.

Therefore, it was submitted that this Court should interfere with the impugned decision of <ORG>.

6. <NAME>, learned senior advocate appearing for the respondent, refuted each one of the contentions advanced on behalf of the appellants and submitted that the ground of laches or maintainability of the petition much less the nature of the remedy that would be available to the respondent was not at all raised in specific terms before <ORG> and when <ORG> had entertained the petition and exercised its jurisdiction, it is no longer open to the appellants to raise such contentions for the first time before this Court.

7. In the absence of constitutional or statutory rights being involved a writ proceeding would not lie to enforce contractual obligations even if it is sought to be enforced against the <ORG> or to avoid contractual liability arising thereto. In the absence of any statutory right Article 226 cannot be availed to claim any money in respect of breach of contract or tort or otherwise. In the present case, the appellants have sought to exercise their powers under Section 7 of the Act and, therefore, though the other consequences may be contractual in nature, the exercise of the right being under a statute, it cannot be said that the respondent could not approach the writ court.

8. So far as the contention regarding laches of the respondent in filing the writ petition is concerned, delay, by itself, may not defeat the claim for relief unless the position of the appellant had been so altered which cannot be retracted on account of lapse of time or inaction of the other party. This aspect being dependent upon the examination of the facts of the case and such contention not having been raised before <ORG>, it would not be appropriate to allow the appellants to raise such contention for the first time before us. Besides, we may notice that the period for which the option of renewal has been exercised has not come to an end. During the subsistence of such period certainly the respondent could make a complaint that such exercise of option was not available to the appellants and, therefore, the jurisdiction of <ORG> could be invoked even at a later stage. Further, the appellants are not put to undue hardship in any mariner by reason of this delay in approaching <ORG> for a relief.

9. We may now advert to the contention that the writ remedy is not appropriate in this case. Where interpretation of a contract arises in relation to immovable property and in working such contract or relief thereof or any other fall out thereto may have the effect of giving rise to an action in tort or for damages, the appropriate remedy would be a civil suit. But if the facts pleaded before the court are of such nature which do not involve any complicated questions of fact needing elaborate investigation of the same, <ORG> could also exercise writ jurisdiction under Article 226 of the Constitution in such matters. There can be no hard and fast rule in such matters. When <ORG> has chosen to exercise its powers under Article 226 of the Constitution we cannot say that the discretion exercised in entertaining the petition is wrong.

10. Now, we shall turn to the merits of the case. The merits of the case as to the extent of the period of renewal will entirely depend on the interpretation of Clause 3(g) of the lease deed. Clause 3(g) of the lease deed provided as under:-

That the Lessor shall upon the written request by the Lessee before the expiry of the term hereby created grant to it a lease of the demised premises for a further term of 10(Ten) years from the expiration of the term hereby granted at a monthly rent of Rs. 1720/- and containing the like covenants and provisos as are herein contained including a clause for one renewal for a further term for 10(Ten)years at a monthly rent of Rs. 1920/- and on the same terms and conditions as herein contained so as to give the lessee at its option an aggregate of two renewals each of ten years. Upon such exercise of the right of renewal a fresh lease incorporating all the terms and conditions with Clause No. 3(g) suitably modified on each renewal or deleted in the case of last renewal, shall be executed and registered by both the parties to these presents.

<ORG> took the view that in the absence of a deed of lease Clause 3(g) in the original deed had not been acted upon though the appellant had exercised his option by letter dated May 23, 1979. The learned Counsel for the appellant submitted that this view of <ORG> cannot be supported at all if we read Clause 3(g) in a fair way. According to him, there are two components in Clause 3(g) of the lease deed. The first of which binds the lessor in imperative terms to renew the lease for a period of 10 years from the expiration of the term at a monthly rent of Rs. 1720 per month on same terms as contained in the original lease with a further power of renewal for another term of 10 years at a monthly rent of Rs. 1920/- on the same terms and other conditions as contained in the original lease deed. Thus it is submitted that the option given to the lessee is an aggregate of two renewals each of 10 years. The second component of the said clause, it is submitted, is as to the execution of a fresh lease incorporating the terms and conditions with Clause 3(g) suitably modified on each renewal or deleted in the case of last renewal and shall be executed and registered by both the parties to these presents. He further contended that the second component though requires to be fulfilled does not take away the right of the lessee to renew the lease and, therefore, he submitted that the view taken by <ORG> is fallacious. He further submitted that when the original lease deed itself contemplated renewal even if a lease deed has not been executed does not, by itself, defeat the option for renewal.

11. On the other hand, Shri <NAME> submitted that a covenant for renewal contained in the lease does not ipso facto extend the tenure or term of the lease but only entitles the lessee to obtain a fresh lease in accordance with and in due satisfaction of the law governing the making of leases. He submitted that the terms in agreement provide for renewal of the lease on certain conditions and renewal could not be obtained in piecemeal and in violation of any part and portion and when an option is exercised under the said clause the entire provisions of the same must be followed and complied with. In the present case, the claim for renewal of the lease was not followed up by a deed and, therefore, lease had not been actually renewed, he submitted that mere sending of a letter for renewal of lease would not create a lease to allow renewal of the same. The clause requiring execution of the lease deed incorporating the terms and conditions is a condition which needs to be fulfilled when option for renewal is acted upon. He further submitted that the view taken by <ORG> is perfectly in order.

12. The lease had been granted with effect from October 1, 1969 in favour of <ORG> and on coming into force of the Act on April 23, 1977 the appellant has stepped into its shoes and from that day onwards the appellant has been in possession of the same till now. The crucial question whether option for renewal either in terms of the lease deed or in terms of the Act had been availed of or not is the controversy between the parties now. Litigation between the parties has been going on from 1993 onwards. On expiry of the term the deed provides for renewal for two terms of 10 years each on the same terms and conditions except for enhancement of rent and execution of fresh deed modifying the clause relating to renewal. The appellant gave notice of renewal in terms of the provisions of (i) the deed in letter dated May 23, 1979, and (ii) the Act in the letter dated September 13, 1979. Now it is not necessary to examine the effect of renewal for the earlier period as even on appellant's own showing it is invoking the statute in the latter notice and not the terms of the deed. If that is so, the appellant could seek for renewal only in terms of Section 7 of the Act which enabled it to renew the deed for a period of one term as originally granted. Covenant for renewal is not treated as part of terms prescribing the period of lease but only entitles a lessee to obtain a fresh lease. Renewal of lease could only be for one term and no more, but nevertheless it could be contended that the covenant for renewal was also part of the lease and, therefore, stood incorporated in the renewed lease arising under the Act. However, in the peculiar facts of this case, we think that it is not necessary to enter upon the merits of the controversy regarding the effect of Clause 3(g) of the lease deed or the rights available under the Act for renewal of the lease period. We are of the opinion that ends of justice in this case will be met if we modify the order of <ORG> in the following terms :-

(1) The appellant does not have power to claim exercise of option for any renewal of the lease beyond September 30, 1999;

(2) The appellant seeks for and is granted time to hand over vacant possession of the premises in question to the respondent on or before March 31, 2000, however, subject to filing of the usual undertaking in this Court within a period of four weeks from today;

(3) Rent payable is as per the terms of the lease deed, that is Rs. 1920/- per month which shall be paid till the date of handing over the vacant possession;

(4) If any arrears of rent, as stated above, has not been paid, the same shall be paid within a period of three months from today; and (5) The order made by <ORG> to the extent it is inconsistent with our order shall stand set aside.

13. The appeal is disposed of accordingly.